• CACHE LOGISTICS TRUST (SGX:K2LU)'s 2Q19 DPU of 1.32 Scts (-6.9% y-o-y) below expectations.
• Singapore portfolio occupancy fell to 86.1% as Commodity Hub and former Precise II site faced temporary vacancy challenges.
• On the lookout for further overseas acquisition opportunities to diversify and drive growth.
• Maintain HOLD; Target Price of S$0.75.

HOLD and Target Price of S$0.75 Maintained After Lowering Risk-free Rate Assumptions

• CACHE LOGISTICS TRUST (SGX:K2LU)'s 2Q19 DPU fell 7% y-o-y to 1.32 Scts, mainly on the occupancy dip at Cache Gul LogisCentre (which was recently converted from a master lease to multi-tenanted structure) and CWT Commodity Hub.
• While efforts to backfill these spaces are underway, a recovery could take time to kick in. We have lowered our FY19F-20F DPU projections by 5-6% p.a. as a result.
• We have also cut our risk-free rate assumption by 50bps to 2.5% to reflect market expectations of a lower interest rate environment.

Where We Differ

• More conservative estimates as we believe that the higher proportion of lease renewals from the CWT Commodity Hub and Precise II properties, which have been facing higher vacancies, may put stress on near-term DPU. With active negotiations and remarketing efforts underway, we believe that vacancy challenges should abate as replacement tenants are secured over the medium term.

Potential Catalysts

• Delivering solid Singapore away from Singapore, and Australia now accounts for 29% of total assets post the acquisition of 16 industrial properties – soon to be 17. This strategy has lengthened the land in Australia, while Singapore bottom.

Valuation

• We maintain our HOLD call with a DCF-based Target Price of S$0.75, which assumes WACC of 6.7%.
• At the current Cache Logistics Trust share price, a prospective 7.0% yield for FY20F is on offer.

Key Risks to Our View

• Non-accretive acquisitions. Given the high portfolio NPI yield of around 7%, potential acquisitions are unlikely to offer immediate yield accretion. The value-add will have to come from strong cashflows and eventually higher capital values.

What's New - 2Q19 DPU of 1.32 Scts Was Below Expectations

CACHE LOGISTICS TRUST 2Q19 DPU of 1.32 Scts

• The 6.9% y-o-y and 12.7% q-o-q decline in 2Q19 DPU was attributed mainly to
  1. lower structure, and
  2. absence of 2018, and
  3. occupancy dip at.
• This was partially offset by contributions from Cache Logistics Trust’s newly acquired warehouse in Altona (Australia), which was completed in April 2019.
• Overall 1H19 DPU of 2.83 Scts formed just 46% of our FY19F estimates, which was below expectations.

Navigating near-term hurdles, but Australia should provide some relief

• Portfolio occupancy fell from 94.8% (1Q19) to 94% (2Q), mostly driven by its Singapore portfolio, which saw a 6.1- ppt sequential decline in occupancy to approximately 86.1%.
• Underlying occupancy is estimated to be around 75% currently, with several tenant remarketing efforts currently in the works.
• Meanwhile, Cache Logistics Trust’s Australian properties continued to demonstrate resilience with stable occupancy of 98%.
• Rent reversion of +19.4% for 2Q19 was a positive surprise but is unlikely to be repeated as we understand that it was largely due to the successful renewal of an under-rented and sizeable lease in Australia which came up during the quarter.

Update on CWT-backed Leases

• Cache Logistics Trust’s exposure to CWT is mainly limited to the Commodity Hub and Pandan Logistics Hub properties.
• These predominantly include prime spaces, which the Manager is confident of re-letting at current (or even higher) rents collected from CWT, if the opportunity arises.
• Average CWT-backed lease expiries have fallen under one year with three months of security deposits in place, which provides downside protection.

Source: DBS Research - 25 Jul 2019