Cambridge – Daiwa

Quarterly improvement in gross revenue and net-property income

What has changed?

• Cambridge announced its 3Q09 results on 27 October. Net-property income (NPI) was 1.3% above our forecast, while distribution per unit (DPU) of 1.34¢ was 9% above our forecast.

Impact

• Gross revenue increased by 1.3% QoQ and was 1.6% above our forecast. Overall occupancy improved to 99.7% (from 99.5% in the previous quarter). According to the manager, all leases expiring in 3Q09 were renewed. Rental renewal risk remains one of the lowest in the sector, with only 6.6% of leases (by gross revenue) up for renewal in 2009-12.

• The major positive variances came from lower-than-expected other trust expenses and higher-than-expected (pre-distribution) adjustments.

• We have revised up our DPU forecasts by 1.7% for FY09, 3.1% for FY10, and 2.6% for FY11 after raising our portfolio-occupancy assumption to 97.5% from 96%.

Valuation

• We have raised our six-month target price to S$0.54 (from S$0.53), based on our RNG valuation (a finite-life Gordon Growth Model), which assumes an effective portfolio cap rate of 7.5%. Cambridge trades at a 12-month forward yield of 11.1% based on our revised DPU forecasts. NAV was S$0.60 as at 30 September 2009.

Catalysts and action

• We maintain our 2 (Outperform) rating for Cambridge, as we believe its recent operating performance highlights the stability of its distributions. We believe Cambridge faces a moderate risk of equity fundraising, since the manager has guided for a long-term target gearing ratio of 30-35% compared with the latest gearing of 42.6%. However, the DPU dilution could be moderated from a successful sale of some assets above book value.