CLT – AmFraser

Delivered on expectations. Cache’s 2Q14 gross revenue and NPI were within 0.8% and 2.2% of our forecasts, with 1H14 DPU of 4.287c forming 50% of our FY14 estimate. The 2Q distribution of 2.147c will be paid on 26 August. Gross property revenue and distributable income were respectively 1.7% and 0.5% higher YoY.

Strategic shift towards multi-tenanted assets… While only 1% of leases is set to expire in the rest of FY14, management has already begun to plan ahead for FY15, securing 63% of pre-committed leases by NLA for C&P Changi Districentre. This comes as management and major tenants CWT and C&P have jointly agreed to wind down the master tenancies, though they will still occupy c.50% of total NLA at the end of their master leases in April 2015.

…but outlook clouded by new JTC policy, record supply. The new JTC requirement for anchor subtenants to lease ≥70% of GFA for a minimum of 3 years, coupled with the record supply of industrial space coming online in FY14, will put further pressure on an already-soft market. According to Colliers, 2Q14 warehouse rents declined 1.6-2.4%, the third consecutive quarterly decline.

Venturing beyond core markets? Interestingly, we note management highlighted quality deal flow in investible markets such as Australia and China had increased. With a 2013 Moody’s rating of Baa3 Stable and current aggregate leverage of 28.9% as of 2Q14, we think Cache could potentially make opportunistic acquisitions outside its core markets should something attractive come along, while remaining at comfortable gearing levels of c.40%, implyingS$95.9m of debt headroom above FY14F levels.

FV $1.41 unchanged on solid results. We keep our DCF-derived target price unchanged on Cache’s solid performance and FY14F yield of 6.9% despite headwinds in its core market, keeping an eye on both market reactions to leasing policy and developments overseas.