CLT – OCBC

Stable income profile; but watch inflation

6.3% price upside since IPO. Cache Logistics Trust (CLT) was listed on SGX-ST on 12 Apr 2010 at an offering price of S$0.88. Compared to many companies listed last year that are still in the red, CLT’s share price has gone up 6.3% since IPO. It has six quality logistics properties located in Singapore, which are 100% leased with triple-net master-lease structures. FY10 DPU of 5.558 S-cents represents an annualized yield of 8.2%.

Initiate BUY on CLT. CLT’s sponsor, CWT, is one of the largest listed logistics operators in SEA. With forward yields of circa 8% for FY11/FY12, CLT also compares favorably with the overall S-REITs sector average yield of 6.9%. CLT enjoys stable rental-income streams as all properties are on master-leases to its sponsor (CWT) and CWT’s parent (C&P). It is also granted a ROFR to a rich pipeline of CWT/C&P-owned assets for future acquisitions. With total returns exceeding 10%, we initiate BUY on CLT with a fair value of S$1.03 largely on valuation grounds. Nonetheless, we remain cautious on its outlook due to increased competition and inflation risk.

Ramp-up niche under pressure. CLT has about 97.3% of portfolio GFA in modern ramp-up warehouses, representing 24.9% market share of ramp-up warehouse space in Singapore. Notwithstanding that this differentiates CLT from its competitors, it also manifests as a concentration risk. In addition, we recognize CLT’s competitive advantage in the ramp-up space in the near term. However, CLT’s assets, which are located in the prime locations of Jurong Industrial Estate, Changi International LogisPark and Airport Logistics Park, are expected to face increased competition due to new warehouse and logistics developments in the vicinity. We think the window of opportunity for its ramp-up advantage is likely to be challenged in the medium- to long-term. Beyond ramp-ups in Singapore, we understand that management is also on the look-outs for overseas acquisitions and further diversification of its portfolio.

Inflation risk. The master lease structure, with a weighted average lease to expiry of 5.8 years as at 31 Dec 2010 and annual rental escalation of 1.5% for the first five years, provides a high degree of predictability and stability in earnings for the trust. Nevertheless, we think the rental escalation component may have been contracted against CLT’s favor, given that Singapore’s FY10 annual inflation rate was 2.8% and MAS forecasted a sharper price inflation of 4% this year. Without further expansionary initiatives, we are wary that CLT’s stable income profile, over the next four years, may continue to be eroded by inflation in real terms. Further catalyst for upping our fair value includes yield-accretive acquisitions both locally and overseas.