■ Only 2% of portfolio NLA is up for lease renewal in the remainder of this year.
■ Australia portfolio expands to fourth warehouse.
■ Three master leases expiring in 2016, with visible pipeline of new warehouse space.
What is the news?
■ Cache Logistics Trust (Cache) will be announcing its 3Q FY15 (Y/E Dec) results on 21 October after trading hours. We highlight the weak 3Q manufacturing indicators in a sector update and give an update of what to expect for 3Q15.
■ Cache had announced last week the acquisition of its fourth warehouse in Wacol, Queensland, Australia.
■ Minimal impact for now. We believe from weak Industrial activity during 3Q FY15 is minimal as only 2% of portfolio NLA is up for renewal in the remainder of 2015. However, there are three master-leases expiring in 2016. The three properties are Schenker Megahub (Aug 2016), Hi-Speed Logistics Centre (Oct 2016) and Air Market Logistics Centre (Aug 2016). The three properties account for c.12% of portfolio NLA.
■ Large supply of new warehouse space coming on stream in 2016, will put pressure on properties with master leases expiring. The master leases expiring in 2016 will coincide with the supply of new warehouses coming on stream. 0.65 million sqm of new warehouse space in 2016 will be added on to an estimated 8.76 million sqm (as at end of 2015), increasing the supply by c.7.4%. Expect the Manager to have to give generous rental incentives in order to retain tenants.
■ Balance of divestment proceeds still available for distribution. Kim Heng warehouse was divested in June 2015 for S$9.7 million and a partial distribution of S$1.45 million from the divestment was paid out in the 2Q FY15 distribution. There is a balance of S$8.25 million that is available for distribution or other uses.
■ Support to DPU will come in 1Q FY16 from acquisition and completion of Build-to-suit project. The fourth Australian warehouse (Wacol) will begin contributing in November 2015, while the BTS DHL Supply Chain Advanced Regional Centre (DSC ARC) will start contributing in January 2016. These additional properties should boost the portfolio income, offsetting the divestment of the Kim Heng warehouse and uncertainties in the master lease expiries.
■ Prudent debt expiry management; equity fund raising (EFR) is on the cards. While gearing is expected to rise to 39.4% from 38% due to the acquisition of the Wacol warehouse, there is no refinancing requirement until 2017. At the same time, the Manager had said previously of its willingness to utilise the balance sheet and push gearing to 40%. With gearing now at 39.4%, we see EFR as a possibility.
We make the following adjustments to our financial model:
■ Pushed the initial DSC ARC contribution to commence in 1Q FY16, instead of 4Q FY15 as originally assumed to be in conjunction with property receiving TOP.
■ Incorporate the acquisition of the Wacol warehouse.
■ Lower our expectations for FY16, in view of the expiry of master leases together with large supply of new warehouse space.
We see valuation close to historical low and yield close to historical high. We maintain our "Accumulate" rating on Cache, with lower DDM valuation of S$1.16 (Previous: S$1.27), giving an implied forward P/NAV of 1.2x. (Read Report)
Source : Phillip Securities Research