Cambridge – DBSV

Still "Work in Progress"

• 2Q12 results in line, 1H DPU makes up 49% of our forecast.
• Acquisitions and AEIs to underpin earnings growth in the coming quarters
• Portfolio rebalancing continues, redeployment is key
• Maintain BUY, TP raised to S$0.65

Highlights

Improved set of 2Q12 results. Cambridge REIT (CREIT) reported a 10% and 9% y-o-y rise in topline and net property income to S$21.5m and S$18.4m respectively. Growth was largely attributable to the additional income from the acquisition of six properties a year ago, organic growth from rental escalations (single tenanted buildings) and higher reversions from its multi-tenanted properties. Portfolio occupancy remained high at 99.1% (vs 98.5% in 1Q12). This more than offset the loss of income from its divestments over the same period. Distributable income rose 15% to S$14.1m (inclusive of S$0.9m of capital distribution), translating to a DPU of 1.18 Scts (+14%).

Our View

Acquisitions and AEIs to contribute in coming quarters. With organic performance to remain stable, earnings growth will be driven by the recently acquired 16 Tai Seng Street (S$59.3m) and the expected completion of development of Tuas View Circuit (BTS for Peter Polyethylene) in Aug 12, while other development projects continue to remain on track for completion in the coming quarters up till 2013.

Portfolio rebalancing continues; redeployment of proceeds is key. The manager has 4 properties (worth S$198m) for sale – amongst them are two properties, valued at S$101.6m, which will be compulsorily acquired by SLA in Jan 13. We understand that plans are underway to redeploy capital towards new acquisitions and we believe the manager is looking to acquire these targets before the end of FY12 in order to compensate for the expected loss of rental income. We tweak our estimates slightly to account for the redeployment of proceeds from the SLA acquisition into new acquisitions in 2013.

Recommendation

BUY maintained, TP raised to S$0.65. Our target price is nudged up to S$0.65 after rolling forward our valuations and taking a lower discount rate with lower risk free assumptions. CREIT continues to offer attractive prospective FY12-13F yields of 8.0-8.3%. Downside risk to our estimates hinges on the slower than projected deployment of divestment proceeds.