Cache Logistics Trust (CIMB)

OUTPERFORM Maintained
S$0.94 Target: S$1.32
Mkt.Cap: S$598m/US$482m

Maiden acquisition overseas

First asset in China

Cache has acquired its first overseas asset, in China, through a sale-and-leaseback arrangement with sponsor CWT for Rmb71m (S$13.5m), 7-8% below valuation. We expect the deal to be DPU-accretive with NPI yields of 8.6% surpassing its current portfolio average of 7.6%. Nonetheless, we are neutral on the deal given limited DPU accretion of 0.03ct (+0.3%), increased risks in a new location and insufficient step-up increases to counter Chinese inflation. We keep our DPU estimates and DDM target price of S$1.32 (discount rate 8.4%) as we had factored in acquisition growth. Cache trades at 1x P/BV and offers a forward DPU yield of 10%. We see catalysts from more accretive acquisitions.

The news

Cache will be acquiring a chemical warehouse facility in Shanghai under rights of first refusal from its sponsor, CWT Ltd, through sale and leaseback for 3+3 years. The purchase price is Rmb71m or Rmb487psf (S$13.5m or S$93psf). A triple net rent of Rmb1.30 psm per day for the first year comes with a 2% annual step-up. The 13,547 sq m warehouse is located in Jinshan District in the Shanghai Chemical Industrial Park, an industrial zone in Shanghai specialising in the development of petrochemicals and fine chemicals. The park is also one of the largest and fullyintegrated petrochemical bases in Asia. Developed by CWT in 2007, the warehouse has high-quality specifications and caters to a variety of chemical warehousing classes.

Comments

Yield-accretive but concerns increase. The Rmb71m price is 7-8% below valuation. Acquired at an NPI yield of 8.6% vs. its current portfolio average of 7.6%, the acquisition is expected to add to yields. The acquisition will be fully debt-funded and management expects annualised DPU accretion of 0.03ct (0.3% of FY10’s annualised DPU). However, we are not too excited given the smaller spread between property yields and risk-free rates in China (estimated 300bp) relative to Singapore (estimated 500bp). The leaseback period of three years may also not be sufficient to mitigate risks from foreign exposure. Additionally, the small step-up increase of 2% is below Chinese inflation levels of about 5%, diminishing the advantage of a discounted purchase price.

Funding with S$ debt. We understand that the acquisition will be funded with a S$-denominated loan. With the yuan on the uptrend, management has no plans to hedge foreign-exchange exposure from this asset in the near term. We do not see much risk in the short term and also expect cost of borrowing to come in slightly below our forecast of 3.5%.

Asset leverage to rise marginally to 29% from 28% after the acquisition, still leaving debt headroom of about S$213m, assuming 45% gearing. Cache still has the right of first refusal to sponsor CWT’s warehouse in Tianjin. Locally, it remains on the lookout for third-party assets and has similar such rights to CWT’s assets in Singapore.

Valuation and recommendation

Maintain Outperform. Our positive view on this acquisition is tempered by increased risks in venturing overseas and insufficient step-up increases to counter Chinese inflation. No changes to our DPU estimates or DDM target price of S$1.32 (discount rate 8.4%) as we had factored in S$220m of acquisitions for 2011. Cache trades at 1x P/BV and a prospective forward yield of 10%. We see catalysts from more accretive acquisitions.