Cache Logistics Trust - RHB Invest 2018-01-22: Looking Beyond The Near-Term Weakness

CACHE LOGISTICS TRUST K2LU.SI

Cache Logistics Trust - Looking Beyond The Near-Term Weakness

Upgrade Cache Logistics Trust to BUY (from Neutral) as we see the following catalysts:
1. SG Logistics sector rents to bottom out in 1H18 ;
2. Overhang removed from Schenker lease disputes and high gearing;
3. Potential near-term acquisitions to deliver DPU growth.
While consensus remain concerned about near-term rent pressures, we believe the negatives are well priced-in. Upside surprises could come from lower interest costs and tax exemptions for rental top-up income.

Based on CBRE data, Singapore (SG) warehouse supply for next two years is expected to average at ~1.9m sqf pa, considerably lower than the past 5-year average supply of ~5m sqf pa. The incoming supply also compares favourably with the past 5-year average demand of ~3.9m sqf.
The high influx of supply amidst a weak demand has been the key reason behind the steep rent decline. With supply declining, we expect the pressure on rents to slow down and start improving by 2H18.
Management added that it is seeing a pick-up in leasing enquiries in line with recent positive manufacturing data but cautioned that the market still remains competitive due to the huge influx of warehouse space (~9m sqf) last year.

The favourable resolution of 51 Alps Avenue lease disputes – as reported in Resolution Of Schenker Lease Dispute dated 1 Nov 2017 – has removed a key overhang on its portfolio.
Post resolution, anchor tenant Schenker Singapore Pte Ltd (Schenker) would continue to lease the property until Aug 2021 with the overall rents received by Cache Logistics Trust (Cache) comparable to current market rates. Additionally, it raised SGD 102.7m via a rights issue in Sep 2017 to address investor concerns over its high gearing.

Cache Logistics Trust also announced its proposed divestment of 40 Alps Avenue (40AA) for SGD73.8m, which is expected to be completed by 1Q18.
We view the move favourably as the property has a lower occupancy of 74% compared to its portfolio average of 96.6%. The proceeds from the divestment would be used to repay the debt.

Post rights issue and recent divestment Cache’s gearing would be reduced to 32.4%, presenting a comfortable headroom of ~SGD160m (assuming 40% levels). Management expressed confidence that it would soon be able to make yield accretive acquisitions to offset the shortfall.
The Australian market, which currently accounts for 17% of its assets, remains the preferred market in the near-term for acquisitions due to its attractive yields, freehold land tenure and long weighted average lease expiry (WALE) profile.

We have revised higher our FY18F-19F DPU by 2-4% factoring in interest cost savings and higher rents. Our Cost of Equity assumptions are also lowered to 8% (from 8.7%) to better reflect the current low-interest rate environment.
Key risks are the unexpected slowdown in SG manufacturing sector growth and sharp spike in interest rates.
Cache Logistics Trust offers FY18F yield of 7.3%, significantly higher than S-REIT’s 5.5%.

Vijay Natarajan RHB Invest | http://www.rhbinvest.com.sg/ 2018-01-22

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