Cache Logistics Trust: Rebalancing strategy paying off July 24, 2017

PSR Recommendation: NEUTRALStatus: UpgradedTarget Price: 0.86
  • 2Q17 gross revenue exceeded our forecast by 3.9%
  • 2Q17 DPU from operations exceeded our forecast by 9.0%
  • QoQ improvement in both underlying distributable income and DPU from operations
  • Adjusted our FY17e/FY18e DPU forecasts higher by 5.1%/3.9%

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The positives

  • QoQ higher occupancy from 97.2% to 98.3%: This was as a result of new leases at Cache Cold Centre, Cache Changi Districentre 1 and DSC ARC.
  • Unchanged QoQ DPU of 1.80 cents: Achieved through top-ups of capital distribution (2Q17/1Q17: 0.013/0.103 cents) from Kim Heng Warehouse (divested in June 2015 for S$9.7 million). S$8.53 million in capital distribution has been paid out since 2Q15.
  • Excluding the effect of the top-ups, underlying DPU from operations actually grew 5.3% QoQ.
  • Minimal leasing risk for the remainder of 2017: Only 1.8% of NLA expiring in 2H 2017.

The negatives

  • Negative rent reversions during the quarter: Passing rent is -8% to -10% YoY, and there was an outlier renewal done at -20% reversion.
  • Aggregate leverage at 43.4% remains just shy of the statutory 45% limit: The Manager is adopting a portfolio rebalancing strategy to manage the aggregate leverage. However, we view an equity fund raising or utilising alternative sources of funds (such as perpetual securities) as having a more meaningful effect.
  • 51 Alps Avenue rental dispute unresolved: Legal proceedings is taking longer than expected. The Manager is committed to vigorously defending the interest of unitholders.

Outlook

The outlook is stable to negative. Rebalancing strategy of diversifying into Australia is paying off, with QoQ higher underlying distributable income and DPU from operations. Oversupply persists in Singapore, with likely overhang into 2018. Key risk is the expiry of the CWT Commodity Hub master lease in April 2018 (13% of NLA). However, leases with some of the underlying tenants have already been secured, should the master lease not be renewed.

Upgrade to Neutral; higher target price of $0.86 (previously $0.75)

We raised our FY17e/FY18e DPU forecast by 5.1%/3.9% as we revisit our assumptions. Our target price represents an implied FY17e forward P/NAV multiple of 1.12x, which compares against the FTSE REIT Index forward 12-months P/NAV multiple of 1.05x.

We also bumped up our terminal growth assumption to -0.5% from -1.5% on signs of the rebalancing strategy paying off. Successful execution of lowering aggregate leverage would lead us to raise our terminal growth assumption further.

Relative valuation

Cache Logistics Trust is over-valued relative to logistics peers in terms of P/NAV multiple.

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About the author

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Richard Leow
Investment Analyst
Phillip Securities Research Pte Ltd

Richard covers the Transport Sector and Industrial REITs. He graduated with a Master of Science in Applied Finance from the Singapore Management University. He holds the CFTe and FRM certifications and is a CFA charterholder.

He was ranked #2 Top Stock Picker for Resources & Infrastructure in the 2016 Thomson Reuters Analyst Awards.

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