Cache Logistics Trust - RHB Invest 2018-04-26: Passing The Earnings Trough

CACHE LOGISTICS TRUST K2LU.SI

Cache Logistics Trust - Passing The Earnings Trough

With the expected bottoming of rental rates of the SG logistic sector by 2H18, we believe Cache Logistics Trust is also nearing the bottom of the DPU downcycle, which was caused by the imbalance in demand and supply. The favourable resolution of the matter involving the Schenker leases and a rights issuance have also removed the overhang surrounding its high gearing levels and rental disputes.
We expect the rebalancing of its portfolio in the Australian market to slowly pay off in the coming years. Cache Logistics Trust offers an attractive FY18F yield of 7.8% – significantly higher than the S-REIT average of 6%.

Cache Logistics Trust’s (Cache) 1Q18 DPU of SGD0.0151 accounted for 23% of our full-year estimate.
Gross revenue and net property income (NPI) were higher at 7.3% and 10% y-o-y respectively, on the back of partial acquisition contributions, higher revenue from 51 Alps Avenue Singapore (51AA), and lower property expenses.
Distributable income for 1Q18 was down 0.6%YoY, as a result of the absence of capital distributions during the quarter.

Amidst a competitive home market, Cache has been actively diversifying its exposure in Australia over the last few years. Key merits of such diversification are a longer weighted average lease to expiry (WALE), freehold land tenure, inbuilt rent escalations and similar country risk profile.
Australia now accounts for 28% of its portfolio value (prior to 2015: 0%). More recently, Cache completed acquiring a portfolio of nine logistic properties in February that are expected to begin fully contributing to its earnings from 2Q18. The yield-accretive acquisition was fully funded by an issuance of perpetual securities and a 5-year unsecured loan.

One of Cache’s key assets, CWT Commodity Hub – comprising 26% of total asset value – has been converted from a master lease to a multi-tenancy lease structure post the expiry of its lease term on 12 Apr. CWT Pte Ltd (CWT) would continue to remain the key tenant of the building, occupying approximately 61% of the premises and Cache has already secured leases for another 25% of the remaining space, bringing the total current occupancy to 86%.
Management noted that rental secured, so far, is similar to the expiring master lease gross rental.
We expect the occupancy rate to ramp up above 90% by 2H18, considering it is strategically located at the Jurong Industrial Estate, and boasts of large floor plates and high ceilings.

While rental under the logistics sector is still under pressure, due to the huge influx of warehouse space (~9m sqf) last year, supply pressure is expected to taper off from 2H18. Based on CBRE data, 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 weak demand has been the key reason behind the steep rental decline over the last three years. With supply declining and demand showing signs of a pick-up, we expect the pressure on rental rates to slow down and start improving by 2H18.

While FY18 DPU is expected to dip slightly by 2% due to ongoing lease transitions and logistics sector rents still under pressure, we expect DPU to rise by 4% in subsequent years.
Our DDM-derived Target Price of SGD0.98 is based on a COE of 8% and terminal growth rate of 1%.
Key risks are the unexpected slowdown in manufacturing growth and a sharp spike in interest rates.

Vijay Natarajan RHB Invest | http://www.rhbinvest.com.sg/ 2018-04-26

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