Cambridge – CIMB

Quality yields

We took management on a non-deal roadshow to Singapore, Hong Kong and Malaysia. We found investors generally less familiar with the industrial space and the role of government regulation in Singapore, which mitigates landlords’ exposures to uncertain macros.

IPO assets pave the way for 5-10% rent reversions and development works in FY13/14. Combined with record acquisitions and BTS projects from 2012, we estimate 5% CAGR DPU growth for FY13/14 and strong yield of 7%. We adjust FY13-15 DPUs on reversions and development works, raising DDM-based target price (7.7% discount rate). Maintain Outperform. Accretive acquisitions and development works are catalysts.

A regulated sector

We found offshore investors largely unfamiliar with Singapore’s industrial regulations. The oversupply risk was overstated, while the demand for industrial space was underestimated. JTC’s requirement of owners occupying more than 50% of space results in high pre-commitment levels, despite larger industrial pipeline supply (ex-business parks), while lease renewals before expiries and tenant requests for additional space point to business expansion within Cambridge’s portfolio of 169 tenants. The impact of new measures was a hot topic at the roadshow. Management said reducing the industrial lease tenure from 60 to 30 years had the biggest impact – it reduced demand for BTS projects.

Key drivers for 2013

Management announced nine acquisitions in 2012, with five competed in 2012, two completed YTD and two remaining. These deals, along with full-year contributions from 2012 AEI and developments completed, should lead to FY12-14 DPU CAGR of c.4%.The focus in the next two years will be on master leases expiring, 11% in FY13 and 22% in FY14. Some assets will be divested and others converted to multi-tenanted buildings with expected reversions of 5-10%. Planned plot ratio enhancements of S$50m-100m a year in FY13/14 are expected to boost growth further.

Sweet spot for acquisitions

The share price has re-rated and the stock now trades at a 15% premium to book value, making it easier for acquisitions to be accretive. Yet with vendors raising price expectations, Cambridge will focus on development projects over FY13-14 and ruled out pre-emptive equity fundraising.