• Cost of equity lowered to 9.6%
• FV increases to S$0.82
• Trading at 7.6% FY17F yield

2Q Results Within Expectations

Cache Logistics Trust’s (CACHE) results were within expectations. 2Q17 gross revenue dipped 0.7% YoY to S$27.9m, largely due to the divestment of Cache Changi Districentre 3 and the lower income received under protest for 51 Alps Avenue. NPI fell a greater 4.0% YoY to S$21.7m mainly due to the conversion of master-leased properties to multi-tenancies. 2Q17 DPU fell 9.5% YoY to 1.800 S cents or 25.5% of our full-year forecast, with DPU from operations dropping 10.2% to 1.787 S cents.

We find it encouraging that 2Q17 DPU stayed flat QoQ, with DPU from operations increasing 5.4% QoQ. For 1H17, DPU fell 10.6% to 3.6 S cents or 51.0% of our full-year forecast.

No Update Regarding 51 Alps

With regard to 51 Alps Avenue, there is no update since what was revealed at the 1Q17 results – legal proceedings continue and CACHE continues to assert that Schenker’s Anchor Lease Agreement should be resolved with C&P Land. While we believe it reasonable to expect this issue to be settled by end-2017 in CACHE’s favour, we continue to forecast contributions according to the lower rental rate received under protest for the asset.

Challenges Remain

Given a change in the covering analyst, our cost of equity is lowered slightly from 9.8% to 9.6%. After adjustments, our fair value estimate increases from S$0.79 to S$0.82. Even so, CACHE is currently trading at what we consider an unattractively low 7.6% FY17F yield, relative to other industrial REITs with healthier operating prospects e.g. Viva Industrial Trust (8.4% FY17F yield) and Soilbuild Business Space REIT (8.4% FY17F yield). We remain concerned about the challenging industry conditions.

While CACHE has minimal renewal risk for the 2H17, ~21% of leases by gross rental income is up for renewal in 2018. We also note CACHE’s high gearing ratio of 43.4% as at 30 Jun 2017, though we believe that the management is committed to decreasing the ratio to <40% over time.

Given current prices, we downgrade CACHE from Hold to SELL with a higher fair value of S$0.82.

Source: OCBC Research - 24 Jul 2017