Category: CLT
CLT – OCBC
Stable income profile; but watch inflation
6.3% price upside since IPO. Cache Logistics Trust (CLT) was listed on SGX-ST on 12 Apr 2010 at an offering price of S$0.88. Compared to many companies listed last year that are still in the red, CLT’s share price has gone up 6.3% since IPO. It has six quality logistics properties located in Singapore, which are 100% leased with triple-net master-lease structures. FY10 DPU of 5.558 S-cents represents an annualized yield of 8.2%.
Initiate BUY on CLT. CLT’s sponsor, CWT, is one of the largest listed logistics operators in SEA. With forward yields of circa 8% for FY11/FY12, CLT also compares favorably with the overall S-REITs sector average yield of 6.9%. CLT enjoys stable rental-income streams as all properties are on master-leases to its sponsor (CWT) and CWT’s parent (C&P). It is also granted a ROFR to a rich pipeline of CWT/C&P-owned assets for future acquisitions. With total returns exceeding 10%, we initiate BUY on CLT with a fair value of S$1.03 largely on valuation grounds. Nonetheless, we remain cautious on its outlook due to increased competition and inflation risk.
Ramp-up niche under pressure. CLT has about 97.3% of portfolio GFA in modern ramp-up warehouses, representing 24.9% market share of ramp-up warehouse space in Singapore. Notwithstanding that this differentiates CLT from its competitors, it also manifests as a concentration risk. In addition, we recognize CLT’s competitive advantage in the ramp-up space in the near term. However, CLT’s assets, which are located in the prime locations of Jurong Industrial Estate, Changi International LogisPark and Airport Logistics Park, are expected to face increased competition due to new warehouse and logistics developments in the vicinity. We think the window of opportunity for its ramp-up advantage is likely to be challenged in the medium- to long-term. Beyond ramp-ups in Singapore, we understand that management is also on the look-outs for overseas acquisitions and further diversification of its portfolio.
Inflation risk. The master lease structure, with a weighted average lease to expiry of 5.8 years as at 31 Dec 2010 and annual rental escalation of 1.5% for the first five years, provides a high degree of predictability and stability in earnings for the trust. Nevertheless, we think the rental escalation component may have been contracted against CLT’s favor, given that Singapore’s FY10 annual inflation rate was 2.8% and MAS forecasted a sharper price inflation of 4% this year. Without further expansionary initiatives, we are wary that CLT’s stable income profile, over the next four years, may continue to be eroded by inflation in real terms. Further catalyst for upping our fair value includes yield-accretive acquisitions both locally and overseas.
CLT – CIMB
Meeting expectations
• In line; maintain Outperform. 4Q10 results met Street and our expectations. FY10 DPU of 5.6cts (for 8.6 months of operations since listing) forms 100% of our pro-rated forecast. This translates to an annualised DPU of 7.73cts and yield of 7.8%, above the average S-Reit yield of 5.9% and average industrial REIT yield of 7.5%. We align our NPI margin assumptions with FY10 margins, and edge up our FY11-12 DPU estimates by 1.7%. We also introduce FY13 forecasts. Following our adjustments, our DDM target price climbs to S$1.32 from S$1.30 (discount rate of 8.4%). Cache trades at 1.09x P/BV, just below the 10% premium among its industrial peers but above the 6% premium for S-Reits on average. It remains our sector top pick and we expect stock catalysts from early announcements of accretive acquisitions.
• 4Q10 DPU at 1.94cts was flat qoq. Occupancy (100%) and rents were about the same as all its buildings are on master lease structures. In the quarter, some multinational corporations committed to occupying 350,000 sf (more than 15% of gross floor area) of CWT Commodity Hub for a minimum of eight years, beyond CWT's 5-year master lease. As with its earlier long-lease tenant secured last quarter, Cache has provided assurance to CWT of its right to occupy beyond the master lease (which expires in Apr 15) should the master lease not be renewed. This provides certainty of occupancy beyond the present master lease. Cache is also required to undertake some asset enhancement for its new tenants, with recovery by way of additional rents.
• Acquisition on the cards. Management continues to explore acquisition opportunities from its sponsor and third parties. Asset leverage remained low at 23%, giving Cache debt headroom of S$137m before breaching its gearing cap of 35%. We maintain our assumption of S$220m of acquisitions for this year, believing that Cache will be able to obtain a rating to gear up to 60% when it is ready to acquire beyond S$137m.
CLT – DBSV
Your money in a safe
At a Glance
• 4Q10 DPU of 1.94 Scts in line
• Modest 23% gearing with potential $135m financial headroom
• BUY, maintain TP at S$1.11 (Total Return of 20%)
Comment on Results
4Q10 DPU of 1.94 Scts was in line. Cache reported topline and net property income ("NPI") of S$14.7m and S$14.4m respectively, which was slightly ahead of IPO forecasts but met our estimates. Net interest costs was 5.8% lower compared to forecasts due to a lower all-in rate. As such, distributable income of S$12.3m exceeded forecast by 1.2%, translating to a DPU of 1.94 Scts. Superior financial metrics, modest gearing of 23.7%. Gearing remains at modest level of 23.7%, with interest cover of over 9.3x. Its loan tenure stands at 4 years, with 100% of interest costs fixed at an average all-in 4.36%.
Recommendation
Cache is positioned for further growth. Cache's current gearing empowers the trust with a debt-funded war chest of cS$135m at a gearing limit of 35%, given its non-credit rating status. Going ahead, acquisitions will drive growth. Besides the visible pipeline from sponsor CWT and C&P, the manager is also evaluating 3rd party opportunities in Singapore and the region to grow its portfolio. We have assumed S$100m acquisitions in our numbers. BUY Call, TP maintained at S$1.11. We continue to like Cache for its transparent and sustainable earnings model, with annual step-up provisions ensuring steady growth Attractive FY11-12F yields of 8.4*-8.6%, some 240-260 bps above the Sreit sector average of 6.0%. Further upside will stem from Cache acquiring assets at larger quantum or higher yields than assumed.
Singapore Reits – DBS
The quest for growth
• S-REITs offer FY11 yields of 6.1%, an attractive 340 bps spread against long bonds
• As inflation inches higher, we prefer SREITs with ability to continue delivering strong organic growth
• Strong balance sheets to leverage on in the chase for further acquisitions
• BUY FCT, P-Life, Cache, MLT, CDL HT, ART, CMT
Normalized FY11F yield of 6.1%. The S-REIT sector now trades at a normalized FY11F distribution yield of c6.1%, slightly below its historical mean of c6.5%. Spreads have narrowed but still remain attractive at c340bps above the long-term government bond yield, currently at c2.7%.
The quest for DPU growth. S-REITs offer a good hedge against inflation given that earnings growth can potentially outpace inflation, which is expected to inch higher to 3.2% in 2011. We prefer S-REITs with the ability to deliver growing distributions organically while having the opportunity to acquire accretively. We continue to hold the view that hospitality and retail sectors offer a more robust outlook on the back of expected strong visitor arrivals in 2011. Office REITs are expected to see topline pressure from negative reversions in 2011 though the sector is on an uptrend.
Interest rate hikes to have minimal impact on distributable income. Given the current low interest rate environment, S-REITs have taken the opportunity to refinance, lengthen the debt maturity profile as well as widen their sources of debt, hence enjoying savings in interest. DBS economist expects interest rate hikes only towards the end of 2011. Even then, our scenario analysis reveals that the impact on S-REITs FY11 distributable income is limited to -0.2 to -3.0% as majority of the S-REITs have hedged/fixed their interest rate positions.
Industrial & Sponsored REITs have potential for further accretive acquisitions. Even after acquiring cS$6bn of assets YTD, S-REIT sector gearing remains low at 34.4%. Further growth from acquisitions is possible and we look towards the industrial REITs for their ability to acquire earnings accretive assets given the relative higher yields of industrial assets while sponsored REITs continue to offer long-term portfolio growth visibility to investors from potential asset injections in the medium term.
Stock picks. CMT, FCT, CDL HT and Ascott REIT are expected to deliver strong organic growth potential coupled with sponsor injection possibilities. P-Life offers downside protection as revenue is pegged to inflation. MLT and Cache offer potential earnings surprise given their visible sponsor pipeline.
REITs – CIMB
Still interesting but could grow more risky
• Downgrade to Neutral from Overweight. The SREIT sector met our Overweight expectations since our upgrade in May. While valuations are not demanding and sustained low interest rates remain favourable for REITs, we downgrade the sector on increased risks expected from non-accretive potential acquisitions and possible cash calls as well as limited upside for the large caps. No changes to our earnings estimates or individual stock ratings. Our top pick is still Cache Logistics for its attractive 8.3% yields and undemanding valuations at book value. Among large-cap REITs, CCT as the cheapest is our preferred liquid REIT, provided it is able to make accretive acquisitions. Our top short is CMT, which has limited growth catalysts for the next two years in our view, significant capex needs and possibly increased interest costs if holders of its convertible bonds exercise their put options next year.
• REIT sector trading at book levels. The REIT sector has made a good recovery since its trough and now trades at book levels, above the last two years’ average P/BV of 0.8x. The largest-cap REITs, CMT and AREIT, trade at about 30% premiums to the sector, which is their historical mean premium. A review of the debt profiles of the 14 large- and mid-cap REITs shows healthy asset leverage at 31.6%, and interest cover ratio at 5x.
• Sponsor injections likely to take centre stage in 2011. We anticipate more sponsor injections in 2011 which could include Ion Orchard Shopping Mall (into CMT), Ocean Financial Centre (into KREIT), and Pantai Hospitals in Malaysia (into PLife REIT).
• We expect risk levels to increase as: 1) asset prices rise under intensifying competition from funds and other investors; 2) assets with limited operational histories are unlikely to be accretive in the short term without income support from vendors; 3) a lack of accretive assets locally could drive REITs to acquire more overseas assets, increasing forex uncertainties and tax leakages; 4) the possibility of more cash calls particularly for mega-acquisitions as most REIT managers are unlikely to go for long-term gearing ratios beyond 45%; and 5) an increasing preference for private placements over rights issuances in recent equity fundraising points to a less equitable position for minority REIT investors.