Cache Logistics Trust - RHB Invest 2018-10-29: A Decent Quarter

CACHE LOGISTICS TRUST (SGX:K2LU)

Cache Logistics Trust - A Decent Quarter

Maintain BUY with Target Price of SGD0.84 for 18% upside and 8% yield.
Cache Logistics Trust posted a better q-o-q performance aided by occupancy improvement and higher NPI from several Singapore properties. Occupancy at CWT Commodity Hub has been ramping up steadily post master lease conversion, indicating healthy demand for the property.
With the divestment of JCW, Cache Logistics Trust has now exited China market and should be able to better focus on its assets in Singapore and Australia. Its balance sheet is now stronger, with a modest gearing of 35%, which allows some debt headroom for acquisitions.
Potential upside could come from a favourable tax treatment of the 51AA rental top-up sum, which should lead to a one-off boost in DPU.

Gross revenue and NPI were higher 14.8%/8.1% y-o-y on the back of contribution from acquisitions. NPI margin was lower y-o-y at 73.2% due to conversion of master leases.
Looking ahead we expect the NPI margin to stabilise around these levels. The results were in-line with 3Q/9M18 DPU accounting for 26%/76% of our full year forecasts.

Overall occupancy increased 969%. More importantly, occupancy at Hub, one of asset (26% of total asset value) rose to 94%, indicating healthy oversupply in the market.
Recall that this master April expect occupancy of this asset to 95% in quarters.
Management noted headline secured property are similar to rents but lower due to loss of operating expenses.

Rent reversions for 3Q18 stood at negative 6.6%, slightly lower than those in 2Q18 of negative 4.0%. However, management noted the reversion figure for the quarter was slightly distorted as it was based on only a small lease of 13,400sqft. We expect logistics rents to stabilise by early 2019 as supply slows down considerably to ~1.9m sqft pa over next two years vs 5m sqft last year.

Earlier this month, Cache Logistics Trust announced the disposal of its only asset in China, JCW, for CNY 87m, a 13% premium to its latest valuation.
We see the move positively as the divestment should allow management to better focus its efforts on Singapore and Australian portfolio. The proceeds should be used to repay debt.
Post divestment, gearing remains moderate at 35% offering c.SGD100m debt headroom for acquisitions (assuming 40% as comfortable gearing levels).

In Jul 2018, ARA asset management acquired full control of the REIT’s manager and property manager by acquiring the remaining stake from CWT Pte. Limited. ARA also currently holds a 9.2% stake in Cache Logistics Trust.
The move is positive in our view as it will help quicken the decision making process and presents growth opportunities for Cache Logistics Trust via ARA’s diversified market presence and fund management expertise. ARA was the key contributor for Cache Logistics Trust’s Australian diversification and we believe Cache Logistics Trust will potentially look at ARA’s Korean logistics assets at an opportune time.

Pending clarification on tax treatment, Cache Logistics Trust has retained SGD2.6m of the rental top-up amount of SGD8.2m received from the resolution of 51 Alps Avenue leases last year.
Management expects to obtain a response from the tax authorities by 1Q19.
A favourable ruling in tax transparency treatment (highly likely, in our view) could result in a one-off DPU boost of c.SGD 0.0024, or 4% of FY17 DPU.

Our DDM model is based on a CoE of 8.7% (risk-free rate: 3%) and a terminal growth assumption of 1%.
The key risk to our call is an unexpected slowdown in the manufacturing sector in Singapore.
Cache Logistics Trust offers a FY18/19F yield of > 8%, which is significantly higher than that of S-REITs of c.6.4%.

Vijay Natarajan RHB Securities Research | https://www.rhbinvest.com.sg/ 2018-10-29

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