Cache Logistics Trust - RHB Invest 2019-07-26: A Disappointing Quarter


Cache Logistics Trust - A Disappointing Quarter

  • Maintain BUY, new SGD0.80 Target Price from SGD0.83, 12% total return. CACHE LOGISTICS TRUST (SGX:K2LU)’s 2Q19 DPU missed our/Street estimates, dragged down by lower-than-expected occupancy rates at its Singapore assets.
  • The near-term outlook for the Singapore market remains challenging due to uncertain demand, but prospects for its Australian assets remain steady.
  • Despite the muted outlook, its share price is likely to be supported by strong market appetite for high-yield instruments.

Weak performance from Singapore assets.

  • Committed occupancy rates for its Singapore portfolio in 2Q dropped sharply by 6.1ppt to 86.1%, due to transitional vacancies at Commodity Hub (CH) and the master lease conversion at Cache Gul LogisCentre(CGL). Occupancy at CH fell to ~75% but Cache Logistics Trust recently signed some major leases (~308,000 sqf) – which should bring its occupancy rate back to ~90%. CGL’s occupancy rate is at ~66% currently, but this is expected to ramp up in the coming quarters.
  • On the positive side, leasing activity in 2Q was fairly healthy, with ~415,000 sqf in leased space secured (1Q19: 242,200 sqf). Rental reversion for the quarter was also robust (excluding leases with different lease structures) at +19.4%, although management cautioned that this was more of an one-off event, and came specifically from an Australian asset.

Minimal risk from CWT leases.

  • Cache Logistics Trust has been steadily reducing its exposure to CWT Pte Ltd (CWT), with the latter currently accounting for 14.8% of gross rental income. There have been no arrears or delays in payments so far. As remaining WALE for CWT is short (0.8 years) and with Cache Logistics Trust holding a 3-month rental deposit, we see minimal default risk. Management is currently in direct discussions with some CWT end-tenants for lease extensions, and does not dismiss the option of extending leases directly with CWT too, upon securing sufficient deposits.
  • As the space occupied by CWT is also in a prime location with large floor plates, management expects strong end-tenant demand.

Singapore market; looking.

  • Management said Singapore slowdown ahead.
  • In terms of acquisitions, Cache Logistics Trust reiterated its preference for overseas markets and has been actively studying the South Korea market for potential entry. Management guided Korean gearing at debt and equity.

DPU adjustments.

  • We cut FY19-21F DPU by 4-7%, factoring in lower occupancy and rental rates.
  • Our COE also drops by 10bp to 8.5% on the prolonged low interest rate environment.

Vijay Natarajan RHB Securities Research | https://www.rhbinvest.com.sg/ 2019-07-26
SGX Stock Analyst Report BUY MAINTAIN BUY 0.80 DOWN 0.830