• More master leases expiring in FY16
• Maiden contribution to come from DSC ARC
• Valuations appear fair

Leasing risks remain

We believe the operating landscape will remain challenging for Cache Logistics Trust (CACHE) over the next 6-12 months. While management has done a commendable job by bringing the total remaining NLA for renewal in FY15 to just 2%, earnings visibility remains cloudy, in our view, as 16% of its leases (by gross rental income) is expiring in FY16. Of this, the bulk of it is made up by two properties acquired during IPO under master leases – Schenker Megahub and Hi-Speed Logistics Centre.

The two tenants have yet to decide on whether they will be renewing their master leases upon expiry. In the event of a non-renewal, CACHE would face leasing risks, while additional costs would be incurred for the conversion of the assets into multi-tenanted buildings. During CACHE’s recent 2Q15 results, it recorded a sharp 8.3 ppt YoY dip in its NPI margin to 85.9% due partly to conversions of some master leases to multitenanted leases. We are lowering our FY15 and FY16 DPU forecasts by 5.5 and 10.0%, respectively, to account for lower revenue and NPI margin assumptions ahead.

DHL Supply Chain ARC contribution to provide some buffer

A silver lining for CACHE would come from the maiden contribution of its built-to-suit DHL Supply Chain Advanced Regional Centre (DSC ARC) from Jan next year (TOP in Jul 2015). This property located at Tampines LogisPark has a NLA of 928,100 sq ft and is meant to meet DHL’s customers demand in the aerospace, healthcare and technology sectors. DHL will occupy 77% of the space initially, and CACHE is negotiating with prospective tenants to fill up the remaining space.

Lower FV and maintain HOLD

Given our reduced DPU forecasts as highlighted earlier, we consequently lower our fair value estimate from S$1.17 to S$1.00. Despite CACHE offering an estimated FY15 and FY16 distribution yield of 8.3% and 9.1%, respectively, we believe the stock is fairly priced, and hence maintain HOLD on CACHE.

Source: OCBC Research - 4 Sep 2015