Cache Logistics Trust - Maybank Kim Eng 2016-04-04: Stress tested and found compelling

CACHE LOGISTICS TRUST K2LU.SI

Cache Logistics Trust (CACHE SP) - Stress tested and found compelling

After stress testing negative scenarios of vacancy or more multi-tenant conversions, Cache is found to be somewhere between reasonably priced and very compelling.
Upgrade to BUY, TP raised by 1 Sct to SGD0.94 with DPUs tweaked c.1.3% following recent public updates on individual properties’ rents and occupancies.

Cache has a very low lease expiry profile: 12%/3%/28% of revenue for FY16-18. But as we found out last year, the market is very soft, considering the supply and state of demand.
The 12% up for renewal this year is mainly due to Shenker Megahub (6.3%) and Hi-Speed Logistics (4.4%). Thankfully, both properties are in the Airport Logistics Park of Singapore — a Free Trade Zone — where goods can pass through for processing, duty and GST free.
Coupled with being next to Changi Airport makes the properties desirable. In the event of a non-renewal, management is fairly confident that there is underlying demand for such unique properties.
We have also observed that air freight has ticked up over the last 4-5mths.

In the unlikely worst case of complete vacancy, FY16-17 DPU could drop to 7.8/7.1 Scts. In a conversion to multi-tenanted scenario (realistic 90% occupancy), DPU could drop to 8.0/8.0 Scts.
For the former, Cache is trading at a forward yield of 9.2% and 8.4%, vs the cycle mean of 9.0% and -1SD of 7.9%.
For the latter, Cache is trading at a forward yield of 9.5%, halfway between the cycle mean and +1SD of 10.2%.
In the unlikely worst case, the downside is reasonably priced in.
In the conversion case, valuations remain highly compelling.

But neither of the above is our base case. Instead, on both historical and forward DPU, Cache’s yield is at +1SD above its historical average, as well as +1SD above the mean for the spread with the 10yr SGS.
Cache is also cheap relative to peers: the industrial SREIT sector and SREITs in general are both trading at -1SD below the mean for both yield and spread with the 10yr SGS yield.

Joshua Tan Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2016-04-04

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