Delivering another year of stellar performance

Cache Logistics Trust delivered another year of stellar performance, with its FY2012 revenue and distributable income up by 12.4% and 9.5% respectively. Following our downgrade call to hold on 25 October 2012, Cache witnessed a correction of c.6%. While it has recovered ground in recent months, we believe Cache is now close to being fully valued. We maintain HOLD with fair value of S$1.315.

Forward dividend yield of 6.7% for Cache. We continue to like the sustainability of Cache’s dividend yield, which remains one of its key investment positives. Factors namely its triple‐net master lease structure, 1.25%‐2.5% annual rental escalation rates and strong cash flow generation will continue to underpin the stability of Cache’s distribution yield.

Minimal releasing risks in 2013. We would also highlight that Cache faces negligible releasing risks in 2013. Only 2% of its GFA is up for renewal this year, leaving it well‐insulated against current macroeconomic uncertainties.

Hungry for acquisitions. Cache’s current gearing stands at 31.7%, which provides ample headroom for it to pursue acquisitions in its focus markets of Singapore and China. Should Cache choose to finance its acquisition entirely with debt, it would find itself with an additional debt headroom of S$48.8mil. Given the assumption of a 7.1% yield on acquired properties, this would be 2% accretive to our target price. Alternatively, Cache could finance its acquisition through a mix of debt and equity and take on additional leverage of S$127mil based on a debt‐to‐asset ratio of 45%. Assuming that acquisitions come at a 7.1% yield, we estimate that such a scenario would be 3% accretive to our current fair value.

Assessing the impact of the seller’s stamp duty. From a divestment perspective, the recent imposition of the seller’s stamp duty on industrial properties is unlikely to bear a significant impact on Cache given that its assets are held with a long‐term investment horizon in mind. As its potential acquisition targets are typically under JTC leases, which have to fulfil a minimum lease term before they can be divested, Cache is not likely to face a substantially higher acquisition price tag as well.

FY12 TO END ON POSITIVE NOTE

• 4Q results likely to be firm
  
• Strong pipeline of assets
  
• Portfolio to stay resilient
  

Likely to maintain firm performance

Cache Logistics Trust (CACHE) announced that it will release its 4Q12 results after the market close on 21 Jan 2013. We expect CACHE to meet our 4Q NPI forecast of S$18.5m (+11.1% YoY) and distributable income projection of S$14.7m (+9.5%) comfortably, thanks to the contribution from its newly-acquired Pan Asia Logistics Centre and Pandan Logistics Hub. On the DPU level, we anticipate CACHE to maintain its distribution at ~2.1 S cents, not withstanding an enlarged unit base from the private placement in Mar 2012. This translates to robust 10.9% growth in its full-year NPI to S$68.7m and 0.9% growth in DPU to 8.29 S cents.

Acquisition may provide further catalyst

In the coming year, we believe CACHE’s financial performance will remain sturdy, as it continues to benefit from upward rental adjustments and full-year contribution from its past acquisitions. A few industrial properties from its sponsor’s pipeline assets are also ready for acquisition and may boost its income if CACHE injects any of these properties into its portfolio. Based on its last reported financial position, we estimate that CACHE has ~S$42.9m additional debt headroom before it reaches the regulatory aggregate leverage ceiling of 35% (currently at 32.6%). Hence, we believe CACHE may finance any upcoming acquisition using a combination of debt and equity if the transaction size is considerable.

Maintain BUY

We also continue to favour CACHE for its resilient portfolio. While the Singapore Purchasing Managers’ Index (PMI) indicated that the manufacturing sector contracted for the fifth month in Nov, we expect CACHE’s portfolio occupancy to maintain at 100% as the bulk of its leases are based on triple-net master lease structures. Moreover, eight out of 12 of its warehouses have ramp-features, where supply of such space is tight since it requires specialised planning and design specifications to develop. Hence, we expect its portfolio demand to remain strong despite the impending supply (10% of total stock) of warehouse space in 2013. Maintain BUY and S$1.30 fair value.

Good results but fairly valued

3Q12 results inline. 3Q12 revenue at SGD19.1m (+9% QoQ, +14% YoY), was 27% of ours and consensus estimate. The higher revenue was attributable to the additional rental income from upward rental adjustments and new acquisitions. 9M12 revenue at SGD53.5m (+12% YoY), was 75% of ours and consensus estimate. 3Q12 DPU at 2.144 SG-cts (+8% QoQ, +2% YoY) was 27% of ours and consensus

estimates. 9M12 DPU at 6.21 SG-cts (+1% YoY) was 77% of ours and 74% of consensus estimates.

Portfolio review. Portfolio occupancy remains stable at 100% with a weighted average lease expiry of 4.1 years (4.4 yrs prev. qtr). With the acquisition of Pandan Logistics Hub in July, CACHE now has ~23% market share of ramp-up logistics warehouses in Singapore.

Capital Management. Aggregate leverage inched up to 32.6% from 27.5% last quarter, following a capital management exercise in 2Q12 to refinance the existing loan portfolio and fund the acquisition of Pandan Logistics Hub. Half of CACHE’s properties are unencumbered, against which it can raise further financing, should the need arise. 3Q12 all-in financing cost averaged 3.6% with 60% of borrowings expiring in FY15 and the remaining in FY16.

Looks fairly valued. From our estimates, the implied cap rate for CACHE (based on 3Q12 results) is 6.2%. The counter is presently trading at 6.8% FY12 DPU yield, which provides some 60 bps leeway for further yield compression, in our view. CACHE’s predominantly triple-net master leases, long WALE and secured revenue streams provide a high degree of predictability in cash flow and stability in earnings. But we remain wary of its inherent concentration risks on (1) a single asset – CWT Commodity Hub (38% of FY12 GAV) and (2) its main master lessee (CWT/C&P). According to our estimates, CWT/C&P and its associated companies accounts for almost 90% of CACHE’s FY12 gross rental income. With further acquisitions unlikely given the run-up in capital values, we see limited growth prospects moving forward. Reiterate HOLD with a TP of SGD 1.24.

Pandan acquisition kicks in

3Q12 benefitted from acquisitions earlier this year, with net property income up 12.9% yoy. Completion of refinancing led to lower all-in cost of debt; we should see some interest cost savings next quarter. We continue to like the stock for its quality assets and resilient yields.

3Q/9M12 DPU came in slightly below at 25%/73% of our FY12 and 25%/74% of consensus on higher property expenses following rental adjustments. We lower FY12-14 DPUs to factor this in, but raise our DDM-based target price on lower discount rate of 7.7% (2Q12: 8.5%). Maintain Outperform; accretive acquisitions are catalysts.

Another resilient quarter

3Q12 NPI grew 12.9% yoy, trickling down to a 2.3% growth in DPU, as rental contributions kicked in from Pan Asia Logistics Centre and Pandan Logistics Hub. Debt profile was also strengthened following refinancing, with no debt expiring till 2015/16 and all-in cost of debt lowered from 4.28% to 3.57%. We should see some interest cost savings going forward. While gearing inched up on completion of the Pandan acquisition, it remains low at 32.6%.

Potential for growth

We still some potential for acquisition growth from the pipeline of assets from Sponsor. Management has delivered on acquisitions thus far, albeit over a short track record, but surprising us with the size of acquisitions YTD. Organic growth will still be driven by 1.5-2.5% rental step-ups structured into master leases, topped with potential for GFA maximisation or enhancements further down the road when leases expire.

Reasonable price for quality portfolio

Distribution yield stands at 6.8% and 7.1% for FY12/13 on current share price, the highest among industrial S-REITs under our coverage despite a Singapore-centric portfolio of quality assets. We continue to like the stock for its defensiveness from master leases, with one of the longer average lease expiries at 4.1 years, backed by 89% MNC and government entity end users.

Cache Demonstrates Resilience Amid Marco Uncertainties

Results bolstered by positive rental adjustments and acquisitions: Cache reported growth of 14.1% and 12.9% in its gross revenue and net property income (NPI), on a YoY basis, in 3QFY12, which was consistent with our forecasts. Year‐to‐date gross revenue and NPI constitute approximately 74.0% of our end‐2012 forecast. This resilient set of results was partially supported by escalation in rental rates and, to a larger extent, the rental contribution from newly‐acquired assets Pan Asia Logistics Centre and Pandan Logistics Hub.

Distributable income increased by 12.7% YoY, which translates into a 2.3% YoY increase in distribution per unit. This was largely a result of the acquisition of Pandan Logistics Hub and cost savings from debt refinancing. Due to a debt refinancing exercise in 2QFY12, Cache successfully lowered its average all‐in financing cost from 4.38% in 2QFY12 to 3.57% in 3QFY12.

Downgrade to HOLD on rich valuations: Following our initiation on 11 September 2012, Cache has had a decent run‐up of 5.6%. Trading at a price‐to‐book ratio of 1.3 (price ‐to‐book ratio for industrial S‐REITs is currently at 1.06), Cache is relatively expensive to its peers and we believe there is limited scope for further upside. Our fair value of S$1.31 translates to a potential capital appreciation of 7.2%. This, coupled with a 6.7% yield, gives a total return of 13.9%.

That said, we continue to like the sustainability of Cache's distribution yield particularly in view of the challenging macroeconomic backdrop. Sustainability of its yield is underpinned by its triple‐net master lease structure and built‐in rental escalation rates of 1.5‐2.5%. While industrial rents could come under some stress on the back of upcoming supply of industrial land and subdued global trade conditions in the near term, we highlight that Cache is relatively sheltered against these headwinds given that less than 2% of its gross floor area is due for lease renewal in 2013F.

Future acquisitions could serve as positive catalysts: Based on our implied cap rate estimate of 5.9%, we believe Cache stands in a good position to pursue yield‐accretive acquisitions. Assuming that future acquisitions are to be financed with a debt/equity mix of 45/55%, we estimate that Cache has an additional debt headroom of S$103.3mil without obtaining a credit rating. Given the current lowrate environment, we would not be surprised if Cache were to take advantage of the low borrowing rates to further its acquisition growth ambitions. Cache could tap on its sponsor CWT's pipeline of assets on this front.