Cache Logistics Trust - DBS Research 2018-01-19: Firepower To Acquire

SGinvestors.io

CACHE LOGISTICS TRUST K2LU.SI

Cache Logistics Trus - Firepower To Acquire

• Cache Logistics Trust's 4Q17 results weak but within expectations.
• Worst could be over as industry oversupply situation tapers off.
• Active asset recycling with divestment of nonperforming assets; looking to deploy proceeds into higher yielding properties.
• Target Price raised to S$0.90; maintain HOLD.

Raising Target Price to S$0.90. 

• With Cache Logistics Trust (Cache) reportedly looking at acquiring a sizeable logistics portfolio in Australia, if successful, this might prove to be the turning point for the REIT. Subject to clarity on funding options on this deal, we maintain our HOLD call for now.

Where we differ: Highest Target Price in the street. 

• The recent 4Q17 results while weak, was in line with expectations. With downside limited on the back of settlement of Schenker lease in favour of Cache coupled with diminishing downside risk to rental reversions as industry supply tapers off, we believe that the worst could be over for Cache. 
• Our Target Price is adjusted upwards to S$0.90 on the back of lower cost of equity assumptions, with potential upside if debt headroom is deployed into acquisitions.

Potential catalyst: Delivering a solid overseas strategy. 

• A recent media article in Australia reported that Blackstone is potentially looking to sell a A$200m logistics portfolio to Cache but we have not factored this in given uncertainty of completion and timing of this deal. 
• Given its size, we believe that Cache may potentially need to raise between S$50m-S$70m of equity (post EFR gearing of 36%-38%) which would result in an estimated c.1.3%-1.9% accretion to DPU.

Valuation

• Target Price is to S$0.90 (from S$0.83) on the back of lower cost of equity assumptions.

Key Risks to Our View

• Non-accretive acquisition. Given the high portfolio NPI yield of around 7%, it is unlikely that potential acquisitions can offer immediate yield accretion. The value-add will have to come from strong cashflows and eventually higher capital values.

WHAT’S NEW - Results in line; scouting for deals in Australia 

Financial performance lifted by rental top-up from the settlement of 51 Alps Ave.

• Gross revenue for 4Q17 was S$29.6m, an increase of S$2.3m or 8.5% y-o-y. This was mainly due to the rental top-up in respect of 51 Alps Ave, subsequent to the legal settlement as announced on 31 Oct 2017 for the period from 1 Sep 2016 to 31 Dec 2017, as well as higher revenue from DSC ARC, Cache Cold Centre and its Australian properties. This was partially offset by lower revenue from DC2 and divestment of DC3. 
• Net property income (NPI) was S$23.5m, an increase of S$2.2m or 10.2% y-o-y. Full year FY17 gross revenue was S$112.0m, up 0.6% or S$0.7m y-o-y. NPI for the full year was S$87.3m, down 0.8% or S$0.7m y-o-y. 
• DPU was 1.829 Scts for 4Q17 and totalled 7.247 Scts for FY17, representing 107% of our latest forecast, exceeded our expectations mainly due to the more favourable settlement of 51 Alps Ave. But, full year DPU was 6.25% lower y-o-y, the decline was mainly attributable to an enlarged unit base due to the rights issue in Oct 2017.

Settlement of Schenker (i.e. 51 Alps Ave). 

• As announced on 31 Oct 2017, Cache received a lump sum payment of S$8.2m pursuant to an amicable resolution of the legal proceedings in respect of 51 Alps Ave in Singapore. Of this amount, S$3.8m was associated with rental top-up and other associated cost recovery for the 16-month period 1 Sep 2016 to 31 Dec 2017. 
• Out of the S$3.8m, half was distributed in 4Q17 and the other half or S$1.9m has been retained by Cache to be distributed once tax treatment confirmation is received after IRAS’ assessment and will translate to a DPU of 0.176 Scts. The remaining S$4.4m will be distributed evenly over the remaining 44 months left of Schenker’s original lease until 31 Aug 2021.

Savings from financing costs thanks to repayment of debt from rights issue. 

• Net financing costs for full year FY17 was S$18.6m, 4.6% lower than FY16. The decrease in net financing costs was mainly due to S$99.9m partial repayment of the SGD term loan using proceeds of the rights issue in Oct 2017 and interest savings from refinanced S$90.0m unsecured term loan in Dec 2016. 
• The full year all-in financing cost average was 3.56%, slightly lower than 3.60% a year ago. Aggregate leverage ratio dropped from 43.1% to 36.3% over the year. 
• Debt expiry in years shortened from 2.8 years to 2.0 years as major debt of S$94.1m and A$30.0 will be due in FY18.

Occupancy above industry average, though slipped q-o-q.

• The portfolio’s committed occupancy was 96.6%, higher than the industry average of 87.5%, though it slipped from its 3Q17 level of 97.3%. We understand that the full year rental reversion was negative. The weighted average lease expiry (WALE) is 3.2 years. In FY18, 19.3% of leases by gross rental income will be up for renewal, the bulk is from CWT Commodity Hub, the REIT’s largest asset. So far, there is no sign of any tenant vacating, but it is a still key asset that needs to be closely monitored.

Asset revaluation loss mainly affected by a decrease in market rent assumptions and shorter land tenure. 

• Overall portfolio saw a revaluation loss of 2.5% from S$1,236.4m on 31 Dec 2016 to S$1,206.9m o 31 Dec 2017. Average cap rate for Singapore remains at 6.4%, however the valuation was primarily affected by a decrease in market rent assumptions and shorter land tenure. 
• A small cap rate compression was seen at the Australian assets, from 7.2% to 6.9%.

Proposed divestment of Hi-Speed Logistics Centre at 7.0% higher than latest valuation. 

• Cache Logistics Trust also announced the divestment of Hi-Speed Logistics Centre at 40 Alps Ave Singapore for S$73.8m, 7.0% higher than its latest valuation of S$69.0m on 31 Dec 2017. Impact on DPU would be -0.8%. We estimate that exit yield could be below 6% given the low occupancy rate post conversion of the property to a multi-tenanted property a few years ago.
• The sale proceeds is expected to be used to repay debt, which we have priced in. We are positive on this divestment because
  1. it has a low occupancy of 74%, and excluding this would improve overall portfolio occupancy, and
  2. paring down debt will unable Cache more flexibility to fund future acquisitions, which the management has again expressed keen interest. 
• While our estimates indicate a -4% y-o-y dip in DPU in FY18, we believe that this dip is temporary. Gearing will fall to 32%, empowering the REIT to take on acquisitions.

Negatives priced in, Target Price raised to S$0.90. 

• With downside limited on the back of settlement of Schenker lease in favour of Cache coupled with diminishing downside risk to rental reversions as industry supply tapers off, we believe that the worst could be over for Cache. 
• Our Target Price is adjusted upwards to S$0.90 on the back of lower cost of equity assumptions, with potential upside if debt headroom is deployed into acquisitions.

Potential acquisition in Australia. 

• A recent article in the Australian Financial Times reported that Blackstone is potentially selling 10 logistics properties in a portfolio that could be worth up to for A$200m (S$205m, at S$1.05:A$1.0) to ARA Asset management which could be Cache Logistics Trust. Portfolio yield is reportedly at 6.3%.
• We have not priced in this deal given uncertainty of timing of deal completion. Assuming that the REIT acquires the portfolio at the reported price, we believe that Cache could potentially need to raise between S$50m-S$70m of equity (post EFR gearing of 36%-38%) with a potential DPU accretion of up to 1.3%-1.9%.

Derek Tan DBS Vickers | Singapore Research DBS Vickers | http://www.dbsvickers.com/ 2018-01-19

DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 0.90 Up 0.830