Cambridge – DMG
Defensive with growth
Cambridge Industrial Trust (CIT) stands out as most defensive amongst industrial S-reits. FY07 yield of 7.3% is a significant 90-290bps above its comparable peers and backed by a stable income stream. The low P/book NAV of 1.22x indicates little acquisition upside have been factored into share price despite a visible asset pipeline. Rewarding partnerships with logistics services supplier CWT and Mitsui as well as wide business networks, have and would continue to supply a ready stream of new purchases. Acquisition-led growth coupled with organic expansion should translate to a DPU Cagr of 7-8% over the next 2 years. Amongst industrial S-reits, CIT has the greatest scope to enhance its properties which could boost asset backing and overall yields in the medium term. Our DCF-backed price target of $1.01 translates to a potential absolute return of 30%. Recommend buy.
Industrial and logistics-focussed reit. Cambridge Industrial Trust (CIT), an industrial and logistics-focussed reit has one of the most defensive income profile. Long rental contracts ensure sustainable earnings while higher-than-industry-average security deposits would iron out any rental fluctuations from tenant movements.
Growth via acquisitions. Its objective to expand asset base by $500m pa is within reach. In addition to the $119m worth of new buys, it has the first right of refusal and last look at CWT’s assets within the first 3 years of listing. Of the 2.3-2.6msf pipeline, 1.2msf are scheduled to complete this year. Beyond this, CIT can tap from C & P Holdings’ assets.
Inbuilt organic engine. It is well placed to leverage on the rising industrial market with inbuilt rental escalation clauses of 5-7% every 2-3 years. An estimated 78% of portfolio space is up for renewal in FY08, translating to a 4% organic increment to DPU.
The RNAV angle. A portion of CIT’s assets can be redeveloped to maximize floor area. We reckon rebuilding only those properties with <1x plot ratio to their maximum potential, could raise total GFA by 34% and add 10cts or 15% to asset backing, based on current levels. More importantly, these additions do not incur corresponding land costs and returns from these improvements should further enhance overall portfolio yields. These have not been factored into our present estimates.
Attractive risk-reward ratio. CIT offers value in view of its high yield, low beta and defensive attributes. At low P/book NAV of 1.22x, little acquisition expectation appears to have been built into share price and any newsflow should likely surprise on the upside. At our DCF-based price target of $1.01, assuming increasing asset base by $500m over the next 12 months, yield would still be attractive at 5.9%. Recommend buy.