• 3QFY16 results could see some weakness for Cache
• Biggest items to look out for are Court proceedings over Schenker Megahub and the conversion of Hi-Speed Logistics Centre

What is the news?

Cache Logistics Trust (Cache) had announced that it has entered into a holding arrangement with Schenker Singapore Pte Ltd (Schenker) in relation to the Schenker Megahub property located at 51 Alps Avenue, pending the resolution of the Court proceedings commenced by Schenker. Schenker will pay Cache a holding rent of $0.77 psf/month, which Cache will receive “under protest”. The holding arrangement will not be prejudicial to Cache’s right against C&P Land Pte Ltd and C&P Holdings.

How do we view this?

Holding rent at Schenker Megahub is significantly lower than last rent paid

Based on FY15 annual report, gross revenue contribution from Schenker Megahub was S$7.9mn. Gross floor area of the property is 439,956 sqft. This works out to an average rent of $1.50 psf/month in FY15. The holding rent of $0.77 psf/month is almost 50% lower than the last rent paid.

Expect weaker 3QFY16 and 4QFY16 on a qoq basis

Quarter-on-quarter (qoq) weakness in 3QFY16 will come from the lower rent at Schenker Megahub, but this negative development could be subsequently reversed if the outcome of the Court proceedings is favourable to Cache. Qoq weakness in 4QFY16 will come from the conversion of Hi-Speed Logistics Centre to multi-tenanted building, resulting in a negative impact at the net property income (NPI) level. Schenker Megahub and Hi-Speed Logistics Centre will contribute c.6% and c.5% respectively, to FY16 portfolio gross revenue, by our estimates.

3QFY16 core recurring DPU expected to be lower yoy

3QFY15 distribution per unit (DPU) declared was 2.14 cents; this included S$1.5mn of capital distribution from the sales proceeds from the disposal of the Kim Heng warehouse. The core recurring DPU in 3QFY15 was 1.95 cents. Excluding capital distribution, we forecast core recurring 3QFY16 DPU to be 1.81 cents. The lower year-on-year (yoy) DPU is mainly due to the dilutive effects of the Placement that was done in 4QFY15.

Downgrade to “Reduce” rating with lower DDM valuation of S$0.81 (previous: S$0.85)

In view of the lower rent from Schenker Megahub, we have trimmed our gross revenue and DPU estimates for FY16e/FY17e/FY18e by 1.5%/3.6%/3.6% and 1.7%/4.6%/4.7%, respectively.