CLT – CIMB

Two properties for S$40m

Maintain Outperform. Cache Logistics has made its maiden acquisition of two thirdparty warehouses for S$39.8m, at 3-5% below valuation and a combined NPI yield of 8%, marginally above its portfolio yield of 7.9%. The deal should add to its DPU with full debt funding. We like the purchases for their shorter lease tenures of about three years that should better position Cache for a rising rental market. We also like the future development potential of the Penjuru property and the reduced dependence and tenant concentration risks for its sponsor, CWT. We keep our DPU estimates and DDM target price of S$1.32 (discount rate 8.4%) as we had factored in S$220m of acquisitions for 2011. We continue to like Cache for its quality portfolio and scalability, expecting more acquisition catalysts. Cache trades at 1.03x P/BV and offers a prospective dividend yield of 10%.

6 Changi North 1. Acquired from APG Distributors (part of Luxasia Group) for S$30.9m or S$175psf GFA (3% below valuation), this 2-storey ramp-up warehouse is located in an established logistics cluster in the Changi North International LogisPark. The property is 100% leased to three tenants which include the vendor APC, which will lease back one-third of the building and occupy an additional 27,00sf when this space becomes available. The other two tenants, a multinational electronics manufacturing service provider and a logistics service provider, will take up 50% and 16% of NLA for varying lease periods. Weighted average lease expiry is about 3.3 years, fairly short against Cache’s portfolio average of 6.4 years. We estimate passing rent of S$1.16psf/month, marginally below the S$1.20-1.40psf for Cache’s Changi Districentre.

4 Penjuru Lane. Acquired from Kim Heng Tubular Pte Ltd for S$8.9m or S$162psf on GFA (5% below valuation), this single-storey warehouse is approved for chemical and dangerous goods storage. It will be leased back to the vendor for three years, with an option for a further three years. An annual rent step-up of 2% has been structured in the lease. We estimate passing rent of S$1.08psf/month, fairly in line with Cache’s Commodity Hub in the same vicinity, at S$1.05psf.

Comments

We are positive on the acquisition for a number of reasons, including:

1) DPU accretion. The spread between NPI yields and cost of funding is slightly wider at 50bp above our projection. Accretion over last year’s annualised DPU is about 3%.

2) Development potential. We see development potential for the Penjuru asset which has an un-maximised plot ratio of 0.63. At the maximum plot ratio of 2.5, there could be an additional 163,000sf of NLA for extraction, quadrupling its current size. Nonetheless, we expect redevelopment work only in the medium term.

3) Shorter tenure to capture rising rental market. Unlike its IPO assets, the new acquisitions come with much shorter leases of about three years (portfolio average of 6.4 years). This would better position Cache for capturing a rising rental market, in our view.

4) Lower cost of debt. Management indicated a lower cost than the current 4.4% for its 3-year unsecured term loan. We anticipate interest cost of about 3%, below our forecast of 3.5%.

5) Third-party acquisitions, signalling the manager’s efforts to seek out deals independent from its sponsor. We note that the pricing of the two acquisitions on a unit-price basis is also lower than its IPO assets in the same vicinity.

6) Dilutes tenant concentration risks for CWT. Thus far, Cache is wholly dependent on its sponsor CWT for its rental income. With this acquisition, tenant concentration risks would be diluted, although overall contributions from these two third parties are still small at about 7% of NPI.

Valuation and recommendation

Asset leverage to rise to 27.6%. With full debt financing from a 3-year unsecured term loan, asset leverage should rise to about 28% from 23% after the acquisition. Cache’s asset leverage is capped at 35% without a credit rating. However, we believe it would not be difficult for Cache to obtain a credit when it needs to gear beyond this level. Portfolio size will increase 5% to S$784m after the transaction.

Maintain Outperform. Our positive view on this acquisition is tempered by the small quantum of the deal size. No changes to our DPU estimates and DDM target price of S$1.32 (discount rate 8.4%) as we had factored in S$220m of acquisitions for 2011. We anticipate further acquisition catalysts this year. Cache trades at 1.03x P/BV and a prospective forward yield of 10%.