CLT – AmFraser

A Juicy Yield Play

We initiate coverage on Cache Logistics Trust (Cache) with a BUY and a fair value of $1.291 based on DCF. Backed by a quality portfolio of logistics warehouse assets, Cache is well positioned to capture the growth opportunities presented by Singapore’s development as a global logistics hub. Built‐in rental escalation rates of 1.5‐2.5% and the long‐term nature of its triple‐net master lease agreements underpin earnings resilience even in the face of subdued macroeconomic conditions. A forward FY2012‐13 dividend yield of 7.0‐7.3% further accentuates Cache’s attractiveness.

INVESTMENT MERITS

Built‐in rental escalation rates and triple‐net lease structure offer protection against inflation. Cache’s master and multi‐tenanted leases are structured with built‐in rental escalation rates of 1.5% to 2.5%. This, along with its triple‐net master leases, allows Cache to pass on the bulk of its inflationary burden to its master lessees and end‐user tenants.

Backing of a strong sponsor. CWT has provided Cache with a strong pipeline of local and foreign acquisition assets by granting it a Rights of First Refusal (ROFR) on 13 properties, bolstering its inorganic growth plans.

A juicy yield play. The biggest attraction for us is its sustainable FY2012‐13 yield of 7.0‐7.3%. A portfolio of strategic assets, strong underlying occupancy rates and its long‐term triple‐net master lease structure all combine to underpin its earnings stability and thus ensuring the consistency of its attractive dividend yield.

Comfortable debt headroom. Should Cache obtain a credit rating, the company would be able to drive up its aggregate leverage to a maximum of 60%. Amid the current environment of strong liquidity and low interest rates, Cache could be motivated to take on a more aggressive stance on gearing to support its acquisition of desirable assets.

KEY RISKS

Over reliance on master lessees CWT and C&P for rental income. Should CWT Limited and C&P fail to meet their lease obligations, this would severely impact Cache’s bottom‐line and distribution income.

Asset concentration risk. Generating around 40% of its rental revenues from CWT Commodity Hub, Cache is largely exposed to risks that could adversely impact the operations or business of CWT Commodity Hub.

VALUATION

DCF Valuation. We derive a fair value of $1.291 based on a DCF model. Our model factors in a terminal growth rate of 1.5% and is based on the assumptions of a risk‐free rate of 1.38%, a beta of 0.8, and market risk premium of 9.2%.