Results bolstered by positive rental adjustments and acquisitions: Cache reported growth of 14.1% and 12.9% in its gross revenue and net property income (NPI), on a YoY basis, in 3QFY12, which was consistent with our forecasts. Year'to'date gross revenue and NPI constitute approximately 74.0% of our end'2012 forecast. This resilient set of results was partially supported by escalation in rental rates and, to a larger extent, the rental contribution from newly'acquired assets Pan Asia Logistics Centre and Pandan Logistics Hub.

Distributable income increased by 12.7% YoY, which translates into a 2.3% YoY increase in distribution per unit. This was largely a result of the acquisition of Pandan Logistics Hub and cost savings from debt re'nancing. Due to a debt re'nancing exercise in 2QFY12, Cache successfully lowered its average all'in 'nancing cost from 4.38% in 2QFY12 to 3.57% in 3QFY12.

Downgrade to HOLD on rich valuations:  Following our initiation on 11 September 2012, Cache has had a decent run'up of 5.6%. Trading at a price'to'book ratio of 1.3 (price 'to'book ratio for industrial S'REITs is currently at 1.06), Cache is relatively expensive to its peers and we believe there is limited scope for further upside. Our fair value of S$1.31 translates to a potential capital appreciation of 7.2%. This, coupled with a 6.7% yield, gives a total return of 13.9%.

That said, we continue to like the sustainability of Cache's distribution yield  particularly in view of the challenging macroeconomic backdrop. Sustainability of its yield is underpinned by its triple'net master lease structure and built'in rental escalation rates of 1.5'2.5%. While industrial rents could come under some stress on the back of upcoming supply of industrial land and subdued global trade conditions in the near term, we highlight that Cache is relatively sheltered against these headwinds given that less than 2% of its gross 'oor area is due for lease renewal in 2013F.

Future acquisitions could serve as positive catalysts: Based on our implied cap rate estimate of 5.9%, we believe Cache stands in a good position to pursue yield'accretive acquisitions. Assuming that future acquisitions are to be 'nanced with a debt/equity mix of 45/55%, we estimate that Cache has an additional debt headroom of S$103.3mil without obtaining a credit rating. Given the current low'rate environment, we would not be surprised if Cache were to take advantage of the low borrowing rates to further its acquisition growth ambitions. Cache could tap on its sponsor CWT's pipeline of assets on this front.

Source: AmFraser