Cambridge – UOBKH

Compelling BUY Due To Attractive Distribution Yield

Defensive strength from earnings visibility. Cambridge Industrial Trust’s (CIT) weighted average lease term to expiry was 6.4 years as at Jun 08. There are no expiries from 2008 to 2010. The bulk of the leases will expire in 2013 and beyond. CIT is well protected by security deposits averaging 17 months in the form of bankers’ guarantees. Leases are structured with periodic rental step-ups of 5% every two years or 7% every three years, thus providing steady organic growth of 2.5% p.a. Its top 10 tenants accounted for 62.6% of gross rent in Jun 08. Its largest tenant, CWT Limited, accounts for 14.1% of gross rent. Management expects current occupancy of 100% to be maintained in 2H08.

Seeking refinancing via Islamic finance. CIT plans to refinance S$390m variable funding notes expiring in Feb 09 with Shariah-compliant three-year syndicated Ijara (Islamic sale & leaseback). The transaction is subject to approval by unitholders and is expected to be completed by 3Q08. Management expects Islamic Finance to reduce cost of borrowings by at least 20bp compared with conventional banking facilities. CIT will be the first Shariah-compliant real estate investment trust (REIT) listed in Singapore after completing the conversion process.

CIT provides distribution yield of 10.3% for 2009, an attractive spread of 7.2% over 10-year Singapore government bond yield of 3.1%. Its share price has also corrected 39.3% from the peak of S$0.98 in mid-07 and is trading at 12.5% below the price of S$0.68 during the IPO in Jul 06. We have conservatively factored in cost of borrowings of 4.5% to reflect the risk of refinancing short-term borrowings. Initiate coverage with a BUY recommendation and target price of S$0.89 based on the two-stage dividend discount model (required rate of return: 8.5%, growth: 2.8%).