Soft near-term fundamentals, but maintain BUY

• Cache Logistics Trust's 3Q18 DPU of SGD1.475cts was down 4.3% y-o-y, slightly behind our estimates on a weaker rental profile against the recent high warehousing supply in Singapore.
• We trim DPU by 2-3% and lower our DDM-based Target Price to SGD0.90 (COE: 8.0%, LTG: 1.5%).
• Occupancies however remained strong at 96.9%, and we see stronger growth in NPI as rents stabilise and leasing demand picks up. AUM has been cleaned up with the divestment of its single China asset, and we see growth momentum picking up in Australia following its expansion.
• With 8.7% DPU yield, we reiterate BUY.

• Cache Logistics Trust's 3Q18 revenue jumped 14.8% y-o-y/4.9% q-o-q while NPI rose 8.1% y-o-y/ 6.6% q-o-q. This was driven by rising contributions from its nine-property Australian portfolio acquired in Feb 2018 and 51 Alps Ave, with its new lease in place and rental top-up. These offset the conversion of its CWT Commodity Hub master lease to multi-tenancies in April and divestment of Hi-Speed Logistics Centre in May.
• Cache Logistics Trust's 3Q18 DPU fell 4.3% y-o-y with 13.7% new units from its Sep 2017 SGD100m rights issuance, but its rose 3.9% q-o-q on the back of revenue and NPI growth.
• Committed portfolio occupancy was stable at 96.9%, with Singapore’s maintained at 95.4%. That leaves 2.5% of expiring leases by NLA for backfilling by 4Q.
• Rental reversions were -6.6%, slightly worse than the -4.0% in 2Q18. This was consistent with its S-REIT peers’ and could be attributed to an uneven industrial-sector demand recovery from earlier supply surges.

Australian assets delivering; divesting in China

• Australia’s revenue contributions rose 57.5% y-o-y while NPI jumped 61.5% y-o-y. These were boosted by its largest-to-date portfolio acquisition completed in 1Q18.
• Aggregate leverage was 35.6%; it should improve further following its CNY87.0m (SGD17.8m) Jinshan Chemical Warehouse divestment announced in Oct. The divestment was valued at 12.5% above the property’s Aug 2018 valuation and a 22.5% premium to its Jun 2011 acquisition price. It should be completed in 4Q.
• We estimate SGD120m in debt headroom for potential acquisitions.

Swing Factors

Upside

• Earlier-than-expected pick-up in leasing demand driving improvement in occupancy.
• Better-than-anticipated rental reversion trend.
• Accretive acquisitions.

Downside

• Prolonged slowdown in economic activity could reduce demand for industrial space, resulting in lower occupancy and rental rates.
• Termination of long-term leases contributing to weaker portfolio tenant retention rate.
• Sharper-than-expected rise in interest rates could increase cost of debt and negatively impact earnings, with higher cost of capital lowering valuations.