Cache Logistics Trust - OCBC Investment 2019-07-25: Weak Set Of Results Despite S$2.7m Positive One-off

CACHE LOGISTICS TRUST (SGX:K2LU)

Cache Logistics Trust - Weak Set Of Results Despite S$2.7m Positive One-off

CACHE LOGISTICS TRUST (SGX:K2LU) posted results that were below expectations, mainly due to an unexpectedly large decrease in occupancy during the master lease conversion at Precise Two as well as significant transitory downtime between tenants at Commodity Hub.
Cache Logistics Trust's 2Q19 gross revenue decreased 7.4% y-o-y to S$27.8m while NPI dropped 5.4% y-o-y to S$20.5m.
2Q19 DPU dropped 6.9% y-o-y to 1.321 S cents, which we consider below expectations as it came up to 21% of our initial full-year forecast. The drop in DPU was mainly due to lower NPI and a one-off reversal of professional fees associated with the 51 Alps Ave’s legal proceedings in 2Q18, partially offset by a special S$2.7m distribution made in relation to the 51 Alps Avenue tax matter.
As at 30 Jun, Cache Logistics Trust’s gearing stands at 37.9% with 70.9% of debt on fixed rate.

CWT’s gross rental income (GRI) contribution to Cache Logistics Trust now stands at 14.8% and the WALE exposure by GRI is 0.8 years. We are wary of the risk of non-renewal, especially given the short WALE.
While CWT’s operating business is likely to continue, we believe that they may choose to relocate out of Commodity Hub in favour of a new building they have developed. We believe the management will be able to find replacement tenants in a relatively short period of time given the attractiveness of the asset but are mindful of potentially negative rental reversions.
Given that CWT is not in arrears and has not delayed payments, we are not particularly concerned that CWT will default before their leases are up (though they may not renew). In any case, Cache Logistics Trust also maintains ~3 months of security deposits for CWT.

While we expect to see a recovery in Commodity Hub’s occupancy next quarter, we remain mindful of CWT’s leases at Commodity Hub in the next year and have adjusted our forecasts accordingly. With respect to Precise Two (now known as Cache Gul LogisCentre), we are expecting a gradual improvement in occupancy with time.
Looking ahead, for the entire portfolio, leases representing 9.2% of GRI are due to expire for the remainder of FY19. For FY20, leases representing 19.5% of GRI are due for expire.
Portfolio WALE by GRI stands at 3.2 years. After decreasing our risk-free rate from 2.3% to 2.0% and with adjustments post this set of results, our fair value decreases from S$0.74 to S$0.725.
We maintain HOLD on Cache Logistics Trust.

Chu Peng OCBC Investment Research | https://www.iocbc.com/ 2019-07-25

SGX Stock Analyst Report HOLD MAINTAIN HOLD 0.725 DOWN 0.740