CLT – DBSV

DHL project a key earnings driver

• 1Q14 profit in line; DPU fell y-o-y due to larger share base
• High income visibility for rest of 2014 with only 2% of leases expiring
• Built-to-suit project for DHL, a key driver of inorganic growth; gearing to settle at c.36%
• Maintain BUY rating and S$1.29 TP (DCF metric)

Highlights

1Q14 results in line. Topline and net property income grew 8.2% y-o-y to S$20.7m and S$19.6m, respectively. This was led by contribution from an expanded portfolio (Precise Two warehouse), supported by higher rental income from annual step-ups. Interest cost was 2.7% lower y-o-y due to a lower all-in rate of 3.48%. As a result, distributable income grew 5.5% y-o-y to S$16.7m. However, DPU edged down 4.2% y-o-y to 2.14 Scts due to a larger share base. Operating performance was stable compared to the previous quarter.

High income visibility with minimal expiries in 2014; negotiating renewal of master leases due FY15/16. Cache has renewed the lease for Kim Heng Warehouse for another two years, which means minimal lease expiries (2% of rental income) for the rest of FY14. The bulk of its income will expire in FY15F/16F (mainly the master-leases for IPO properties) but the manager is actively engaging with the master lessees (CWT and C&P Limited) to renew the leases.

Our View

Built-to-suit DHL project to drive growth from FY15F. Supported by a portfolio of warehouses under master leases with annual step-ups that offer high income visibility, the manager has embarked on the Trust’s largest built-to-suit project (BTS) to date for DHL Singapore. Construction of this ramp-up warehouse facility is expected to start in the middle of 2014 and would be completed in phases from 2H15. We have assumed Cache would fund this acquisition with debt and expect gearing to settle at c.36% upon completion (vs 29% currently).

Recommendation

BUY, TP S$1.29. The stock is attractive, offering yields of close to 7.4%-7.7% and a total return of 16% to our TP.