CLT – CIMB

Post-results luncheon feedback

Key issues discussed during the post-1Q14 results investor luncheon we recently hosted for Cache were 1) the BTS project for DHL, 2) the leases due for renewal in FY15, 3) the outlook for the warehouse rental market, and 4) Cache’s financing needs. We came away with our positive view on the stock intact.

What Happened

We recently hosted a post-1Q14 results investor luncheon for Cache.

What We Think

The discussion reaffirms our belief that Cache will benefit from the upcoming BTS project. Upon completion, this property will be used as the Asian headquarters of DHL and will be fully committed by the said tenant within two years of the completion of construction. This project is well-timed given a slower market sentiment on the warehousing industry on the back of a short-term oversupply, particularly from the shadow spaces that will be released into the market in the coming quarters.

Cache’s portfolio has historically been very stable, mainly due to the master leases undertaken by its sponsors. However, looking ahead, with 34% of leases due to expire in FY15, there is a risk that some of these upcoming leases may not be renewed by the sponsor. Having said that, we find comfort in management’s confidence that it will continue to achieve high occupancy even if the leases are not renewed. This confidence is underpinned by the strong geographical positioning of the properties and the costs involved for the tenants to move out, thus significantly limiting the number of choices. In addition, even though the rental market remains soft at the moment, management is confident of getting positive rental reversions for these upcoming leases if they are not renewed as the underlying rental rate is still below the market spot rent despite an annual step-up rental rate of 1.5-2.5% p.a. since 2010. According to URA data, the rental rate for warehouses has jumped by c.50% from S$1.50 psf/mth in 1Q10.

What You Should Do

Although some execution risks may arise if the master leases are not renewed, the potential upside to rental rates could mitigate any probable downside in the event of a dip in occupancy. We maintain our Add rating.