Cache Logistics Trust - DBS Research 2018-04-26: Defending The Home Turf

CACHE LOGISTICS TRUST K2LU.SI

Cache Logistics Trust - Defending The Home Turf

Cache Logistics Trust's 1Q18 DPU fell c.13% on the back of an enlarged share base.
Back-filling of vacancy upon expiry of master lease atCommodity Hub in April’18 a priority.
Proceeds from sale of Hi-Speed Centre to pare downgearing to c.35% in the medium term.
Maintain HOLD, Target Price S$0.88.

Maintain our HOLD call on Cache Logistics Trust (Cache) given limited upside to our Target Price.
There is near term stress on DPU given portfolio occupancy pressures, which we believe will only abate in the medium term.
Lowering gearing from planned asset sales could alleviate concerns that the stock’s gearing is at the higher end of peer range.

The recent 1Q18 results remain weak on the back of dilution from past rights issue with DPU falling c.13% y-o-y to 1.507 Scts.
Looking ahead, the expiry of the master lease at Commodity Hub in April 2018 will result in further pressure on earnings, given the 14% spike in vacancy at the asset (portfolio’s committed occupancy to dip to 92.8%).
We however believe that vacancy is transitionary in nature and the Manager should be able to get replacement tenants in the medium term. Our estimates are revised down 6%-7% to account for more conservative occupancy assumptions and recent acquisitions in Australia and perpetual securities issue.

Cache has actively been looking to diversify away from Singapore, and Australia now accounts for c.28% of total assets (through acquisition of 16 industrial properties). This diversification strategy has lengthened the land lease expiry and earnings visibility given the longer leases signed in Australia.
Back home in Singapore, the back-filling of the space at Commodity Hub will help minimise the projected earnings vacuum in the interim.

Target Price is cut to S$0.88 (from S$0.90) on the back of a revision in earnings estimates.

Non-accretive acquisitions. 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.

Cache Logistics Trust (Cache) reported a 7% and 10% y-o-y increase in revenues and net property income to S$29.0m and S$22.9m respectively. The increase was due to 9 newly acquired warehouses in Australia on 15 February 2018, Schenker’s new lease agreement (top-up rental), coupled with annual escalations from existing leases.
Distributable income attributable to unitholders dipped by 0.6% y-o-y to S$16.1m, mainly due to one-off capital distribution a year ago. Stripping that out, distributable income would have been higher by 5.5%.
DPU fell by 12.5% to 1.507 Scts on the back of higher number of shares post equity fund raising in 4Q17.

Of the 1.3m sqft of leases expiring in FY18, Cache has secured close to 0.5m sqft with another 0.2m sqft under documentation, significantly reducing leasing risk. The Manager recently announced the non-renewal of the master-lease at Commodity Hub.
The largest property in the portfolio at 2.2m sqft of NLA, the Manager has managed to retain a committed occupancy of 86%, which is a strong testament of the property’s attributes. However, we estimate that the conversion from a single-tenanted to multi-tenanted property could result in a drop in income given the spike in vacancy, but the back-filling of these spaces will help to reduce the near term drag in earnings.

The Manager intends to use the planned proceeds from the divestment of Hi-Speed Logistics Centre to repay debt that is expiring towards the end of the year, bringing gearing down towards the 35% level, which is at a level that offers more financial flexibility in our view.
Cost of funds remained stable at 3.5%, and more than 60% of interest cost has been hedged into fixed rates.

Our earnings estimates are revised down by 6%-7% in FY18-19 respectively and mainly comes from:
1. Reduction in income from the conversion of the lease at Commodity Hub from single-user to multi-user property. Our revised estimates assumed a lower occupancy rate (88% for FY18F vs 100% previously) and the loss of efficiency (5% GFA loss).
2. Issuance of S$100m perpetuals to fund acquisitions in Australia. We have updated our model to include the acquisition of 9 industrial properties in Australia, coupled with the issuance of S$100m perpetual securities at 5.5% coupon rate.

Derek TAN DBS Vickers | Carmen TAY DBS Vickers | Mervin SONG CFA DBS Vickers | http://www.dbsvickers.com/ 2018-04-26

SGX Stock Analyst Report HOLD Maintain HOLD 0.88 Down 0.900