Cambridge – DBSV

One step at a time

• Portfolio restructuring on track – additional S$70m of assets earmarked for sale

• Gearing could head down towards 38% post restructuring

• Maintain BUY, TP S$0.54, offers total return of 16%

1Q10 results in line. Cambridge REIT (“CIT”) declared a 1Q10 DPU of 1.274 Scts, amounting to 25% of our full year forecast. Revenues grew 1.2% yoy to S$18.6m as a result of higher rentals from rental escalation from selected assets offset by the income vacuum from the divestment of 2 properties. Net property income likewise rose 1.2% to S$16.3m as a result of stable operating margins.

Divestment strategy on track – earmarking additional S$70m of assets. In 1Q10, CIT divested additional 32 strata units in Enterprise Hub, bringing in S$21.5m in proceeds. The manager has earmarked an additional S$70m worth of assets to be sold during the course of this year. Cash received from the divestment are earmarked for debt repayment or can reinvested into new assets. Incorporating the first scenario and assuming debt repayment at the end of FY10, we estimate that (i) impact from the loss on contributions on earnings in FY11 is minimal at -3% and (ii) gearing levels is projected to improve towards 38% in FY11.

Evaluating asset enhancement opportunities. Management also shared that they are exploring several opportunities to enhance a couple of its properties, where plans could include (i) minor works to raise gross NLA or (ii) intensifying current plot ratios at a couple of its properties. While no firm details have been finalized, we believe that the execution of these opportunities could present re-rating catalysts for the stock.

Attractive 10% yields. We like the asset and financial management initiatives by CIT’s, which will result in a stronger balance sheet going forward. The stock currently trades at 0.85x P/bv, below its industrial peers who are trading in the 1.0x – 1.2x P/bv range and offers a stable FY10-11F DPU yields of c10%.