The wait continues

Cache’s 4Q13 revenue and DPU translate to 25% and 24% of our respective quarterly estimates. Taken together with its 9M earnings, full-year revenue and DPU largely met our expectations, at 98% and 99% of our respective FY13 estimates. With its solid portfolio and no debts due to be refinanced in FY14, we believe Cache will continue to provide stable dividends while we await news of potential acquisitions. We maintain our Add rating with an unchanged DDM-based target price (discount rate: 7.8%) of S$1.33.

Another quarter with strong earnings

Cache Logistic just announced its FY13 results, posting revenue of S$81m (+11.4% yoy) and DPU of 8.64Scts (+3.3% yoy). The higher revenue was mainly due to Two Precise, acquired in February 2013, as well as the built-in rental escalation within the portfolio. 4Q13 revenue grew by 8.2% qoq but DPU fell by 0.8%, mainly as a result of the dilution from the placement of 70m units in April and additional cash in the balance sheet. Occupancy for the quarter continued to remain at a respectable 100% level. Property valuation was also up slightly by S$6.7m, with the cap rate unchanged at 6.5-7%.

Tap on AEI for growth

Looking ahead, with asset prices on the high end, we believe the possibility of acquiring assets within Singapore would continue to remain challenged. As a result, management has highlighted that it will focus on seeking acquisitions in Penang, the Klang Valley and China, and to a lesser preference, Iskandar. With gearing currently at 29.1%, Cache will have debt headroom of S$117m for future acquisitions before gearing reaches 40%.

Maintain Add

We expect Cache’s management to take advantage of the low interest rate environment for early refinancing of the S$187.5m loan due in 2HFY15. In addition, we remain confident that Cache will be able to renew the majority of the 34% of leases that will fall due in FY15, whether through a master lease or underlying tenants before they expire. We maintain our Add rating with an unchanged DDM-based target price of S$1.33.

As steady as ever

• FY13 DPU increased 3.3%
  
• Portfolio metrics remained robust
  
• Continued focus on growth
  

4Q13 results within expectations

Cache Logistics Trust (CACHE) announced its 4Q13 results last evening. Gross revenue rose by 8.2% YoY to S$20.7m, while NPI saw an increase of 7.1% to S$19.6m. The growth was due to contribution from acquisition of Precise Two and built-in rental escalation within the portfolio. Distributable income, on the other hand, registered a stronger 9.6% growth to S$16.6m on lower financing costs. However, DPU eased marginally by 0.8% to 2.137 S cents as a result of an enlarged unit base. Nonetheless, FY13 DPU still raked up a 3.3% growth to 8.644 S cents. This is in line with both our and consensus full-year DPU forecasts of 8.59 S cents and 8.7 S cents respectively.

Maintaining its strong form

CACHE continued to maintain a 100% occupancy rate for its portfolio and healthy weighted average lease to expiry of 3.1 years (3.4 years in 3Q). For 2014, only 3% of its GFA are due for renewal, thus giving CACHE strong earnings stability. Management also revealed that CACHE is currently in advanced negotiations with its Sponsor and end-users for the lease renewals coming in 2015 (34% of portfolio GFA), which we view positively in light of the upcoming supply of warehouse space. In the area of capital management, we understand that CACHE is still discussing with banks on the refinancing of its maturing debts in 2015. Aggregate leverage stood at 29.2%, unchanged from that seen in 3Q, while all-in financing costs improved to 3.48% in FY13 from 3.82% in FY12. In addition, 70% of CACHE’s interest exposure is hedged, thereby reducing the uncertainty over its funding costs.

Maintain BUY

On the acquisition front, CACHE shared that Singapore, China and Malaysia continue to be its key markets, but did not shed any details on the timeline or specific assets. Management also reiterated that it will seek redevelopment opportunities and built-to-suit projects. We are keeping our forecasts largely intact pending any development.

However, in view of impending Fed tapering, we reduce our fair value to S$1.20 from S$1.30 to reflect higher equity risk premium and risk free rate. But maintain BUY as upside remains compelling.

Valuations look rich; risks ahead

• FY13 results in line with our and market expectations.
  
• We see industrial REITs facing major downside risks from the impending hike in interest rates and possible recalibration of over-inflated property prices.
  
• CACHE’s properties have been revalued upwards by at most 12-13% since its IPO, but the stock currently trades at 14% premium to book, which is still rich in our view. Maintain SELL with an unchanged DDM-derived TP of SGD1.05.
  

Results in line with expectations

CACHE’s FY13 revenue grew 11.4% YoY to SGD81m, constituting 101% of our and consensus estimates. The increase was attributable to rental contribution from the acquisition of Precise Two in Apr 2013 as well as built-in rental escalation within the portfolio. Full-year DPU grew 3.3% to 8.64 SGD cts, achieving 100% of our and 101% of market forecasts. Weighted average lease term to expiry (WALE) of the portfolio is around 3.1 years, with 65% of the leases due to expire in 2015-2016. CACHE’s aggregate leverage was 29.1%, down slightly from 29.2% in the previous quarter due to revaluation gains of SGD6.7m.

Remain negative on industrial REITs

We see industrial REITs facing major downside risks from the impending hike in interest rates and possible recalibration of over-inflated property prices – both of which can drag NAV down. Other challenges include a fragile global macroeconomic outlook and ample supply in the pipeline. Iskandar Malaysia will also pose competition in the medium term, especially for lower value-added industrial activities within Singapore. We note that CACHE’s properties have been revalued upwards by at most 12-13% since its IPO, but the stock currently trades at a 14% premium to book, which is still rich in our view. Maintain SELL with an unchanged DDM-derived TP of SGD1.05 (Discount rate of 7%).

Building a resilient platform for growth. Cache’s full‐year results are in line, with FY13 DPU of 8.64c representing 101.4% of our full‐year estimate. Driven by built‐in rent escalations and the addition of new properties to the portfolio in FY12 and FY13, distributable income is up by 14.1%. In FY13, Cache also clocked in a revaluation gain of S$6.7mil. We note that this is primarily driven by an improved market valuation of CWT Commodity Hub ‐ bearing testament to its asset quality.

We laud Cache’s proactive efforts on the capital management front. Cache’s aggregate leverage currently stands at 29.1%, translating into a comfortable debt headroom of S$98mil (assuming a target leverage ratio of 35%). Notably, Cache does not face any debt refinancing needs till 2015. Meanwhile, all‐in financing cost is at 3.48%, of which 70% has been hedged into fixed‐rate, and this would considerably mitigate its interest rate risks.

Against the odds. Despite a relatively muted near‐term outlook for warehouse rents, we continue to view Cache’s rental prospects positively. Expiring rents in FY15 are estimated to be below market rents and only 3% of Cache’s portfolio is due for renewal in FY14. We are currently factoring in positive rent reversions of approx. 5% in FY15.

Acquisition pace likely to pick up steam. Owing to heightened competition among S‐REITs and a tougher regulatory environment, the hunt for yield‐accretive assets in Singapore is undeniably proving to be a daunting task. As such, Cache is broadening its acquisition focus to overseas markets such as China and Malaysia.

Conservatively, we factor in S$80mil of acquisitions in FY14 at a NPI yield of 7.5%. This raises our FY14 and FY15 DPU by 2.3% and 7.9% respectively.

An attractive yield opportunity. With an annualized yield of 7.7%, Cache ranks highly amongst the industrial S‐REITs in terms of distribution yields (average: 7.4%). We note that this also represents a 519 basis point spread over the 10‐year Singapore Government

Bond yield ‐ a comfortable level in our view.

Revenue up 8.4% YoY, Distributable income up 9.6%. Cache Logistics Trust reported growth of 8.4% YoY in its Q313 revenue to S$20.7mil, which was in line with our projections. Meanwhile, distributable income for the quarter was up by 9.6% ‐ approx. 2.2% lower than our forecast. Factors behind the revenue and distributable income growth include annual rent escalations of 1.25‐2.5% and rental contribution from new acquisitions in FY12 and FY13.

Enjoying resilient growth. Cache’s overall portfolio occupancy is maintained at 100%, reflecting the resilient nature of its master leases across the majority of its portfolio assets. Further underscoring its resilience, Cache notably has no renewal risk for the remainder of FY13 and has only 3% of its portfolio by GFA that is due for lease expiry in FY14. We also note that lease renewal progress for Jinshan chemical warehouse is well ahead of its June 2014 expiry, reflecting Cache’s commitment to engage in active re‐leasing to minimize renewal risks.

Larger influx of warehouse supply not a major concern. A record supply of warehouse space is expected to come on‐stream in FY14 and FY15. We note, however, that the bulk of the upcoming supply includes committed and owner‐occupied space as well as non‐competing strata‐titled and Jurong Island industrial space, thus mitigating competition risks for Cache.

Minimal refinancing risks. Cache’s leverage currently stands at 29.2%, with 70% of its borrowings already hedged into fixed rates through interest rate swaps. We believe both refinancing risk and interest rate risk are negligible for Cache. Notably, Cache will not be facing any debt refinancing till FY15. In terms of its exposure to rising interest rates, we estimate that a 1% increase in interest rates would lower our projected FY14 DPU by 1.5%.

Maintain BUY on FV S$1.36. Cache declared a DPU of 2.13c in Q313, bringing its YTD DPU to 6.5c. This forms 76.5% of our full‐year DPU forecast of 8.5c. As mentioned in an earlier update on 11 Oct 2013, we believe there is greater valuation comfort at current FY13‐14 yield levels of 7.1‐7.2% and maintain our BUY recommendation on a higher FV of S$1.36.