Cache Logistics Trust - OCBC Investment 2019-04-18: Okay For Now…


Cache Logistics Trust - Okay For Now…

  • CWT Pte Ltd contributes 16.5% to GRI.
  • Base case is no rental default, but downsizing post expiry.
  • Fair Value drops from S$0.76 to S$0.70.

Exposure to CWT Pte Ltd

  • CWT International, a Hong Kong-listed unit of the HNA Group, announced on Tuesday that it has defaulted on a HK$1.4b loan. Securities pledged to the loan facility include CWT Pte Ltd, which is a wholly owned subsidiary of CWT International.
  • Subsequently, Cache Logistics Trust (SGX:K2LU) announced that CWT Pte Ltd contributed 16.5% of its gross rental income as of mid-Apr 2019, mainly as a tenant for CWT Commodity Hub and to a smaller extent, as a tenant for Pandan Logistics Hub. See Cache Logistics Trust's announcements.
  • We estimate that CWT Pte Ltd currently leases around ~60% of the multi-tenanted CWT Commodity Hub, which contributed S$33.6m of gross revenue in FY18, and around ~70% of the anchor-tenanted Pandan Logistics Hub, which contributed S$4.8m of FY18 gross revenue.

Some mitigating factors

  • The weighted average lease to expiry on the CWT Pte Ltd leases is less than one year. CWT Pte Ltd has yet to default on its rental payments and there are currently no arrears for the two leases. Cache Logistics Trust also currently holds a security deposit that averages around three months.
  • In addition, there are underlying end-users for the leases, which Cache Logistics Trust can engage directly. While we believe that some of these factors mitigate the risk involved, we note that exposure to the CWT Pte Ltd is sizeable.

Base case is CWT Pte Ltd’s continued operation, albeit with downsizing

  • CWT Pte Ltd’s logistics arm is an EBITDA-positive business. According to our calculations and CWT International’s financial releases, the logistics business of CWT Pte Ltd generated a positive EBITDA of HK$171m (~S$29m) in 2018, after annualizing the rental costs for its leases with Mapletree Logistics Trust (SGX:M44U); CWT International divested the warehouse to Mapletree Logistics Trust last year.
  • We believe that in the case of a liquidation and subsequent change in control for CWT Pte Ltd, CWT Pte Ltd will likely remain in operation and continue to rent from Cache Logistics Trust (i.e. no rental default). We do, however, forecast 15% downsizing post the expiry of the CWT Pte Ltd leases.
  • As we apply a higher cost of equity of 8.7% (vs. 8.5%), our fair value falls from S$0.76 to S$0.70.
  • While we believe it is most likely that there will be no CWT Pte Ltd rental default, we have also conducted a sensitivity analysis for Cache Logistics Trust’s fair value given different CWT Pte Ltd rental default scenarios (Fair Value of S$0.650 to S$0.685).
  • We maintain HOLD on Cache Logistics Trust.

Deborah Ong OCBC Investment Research | https://www.iocbc.com/ 2019-04-18
SGX Stock Analyst Report HOLD MAINTAIN HOLD 0.70 DOWN 0.760