Slight Miss, But Compelling Valuations; BUY

• CACHE LOGISTICS TRUST (SGX:K2LU)'s 4Q18 DPU of SGD1.502cts was down 5.9% y-o-y and 4% behind our estimate but in line with the Street’s. This was due to lower-than-expected occupancies in Singapore.
• We lower DPU by 4-5% and introduce FY21 estimates. Accordingly, our DDM-based Target Price is revised down to SGD0.85 (COE: 8.2%, LTG: 1.5%).
• Occupancies, however, remained strong at 95.0% from increasing Australian contributions. We also see stronger NPI growth as Singapore rents stabilise and leasing demand picks up.
• Valuations are compelling at 8.2% dividend yields and 1.0x P/BV, both at -1SD of their 8-year averages.
• AUM has been cleaned up with the divestment of its single China asset. Growth should accelerate following its Australian expansion.
• BUY.

Some Near-term Weakness in Singapore…

• Cache Logistics Trust's 4Q18 revenue rose 4.8% y-o-y while NPI declined 0.6% y-o-y. The former was driven by contributions from its 9-property Australian portfolio acquired in Feb 2018, which offset a weaker performance in Singapore. Its Singapore revenue / NPI fell 10.9% / 13.4% y-o-y, with the:
  1. conversion of its Commodity Hub master lease to multi-tenancies in Apr,
  2. divestment of Hi-Speed Logistics Centre in May, and
  3. absence of a one-time rental top-up in 4Q17 at 51 Alps Ave.
• As such, Cache Logistics Trust's 4Q18 DPU fell 5.9% y-o-y, also due to SGD1.4m in coupon payments for its SGD100m perpetuals and withholding tax arising from its Jinshan Chemical Warehouse divestment.
• Committed portfolio occupancy dipped q-o-q from 96.9% from 95.0%. Singapore’s was down from 95.4% to 92.5% while rental reversions were -4.4%, slightly better than the -6.6% in 3Q18. This was consistent with its industrial S-REIT peers which we attribute to an uneven industrial-sector recovery from an earlier supply surge.

… But Cushioned by Australian Assets

• Revenue from Cache Logistics Trust's Australian assets doubled y-o-y while NPI jumped 71.0%. These were boosted by its largest-to-date portfolio acquisition completed in 1Q18.
• Aggregate leverage was 36.2%, leaving an estimated SGD80-200m in debt headroom for potential acquisitions.
• Management continues to eye assets in Australia and New Zealand for their freehold land.

Source: Maybank Kim Eng Research - 25 Jan 2019