BUY
Price S$0.505
Previous S$0.59
Target S$0.595
2Q11 DP U in-line with expectation. Cambridge Industrial Trust (CIT) reported a lower DPU of 1.036S¢ in 2Q11 (-16.3% YoY; +3.5% QoQ) due to enlargement of share base as a result of rights issue undertaken in Apr 2011. Net property income rose 4.9% YoY to S$16.9m (+2.0% QoQ) on the back of higher rental income partially offset by loss of income from divested strata units. Separately, CIT has concluded three acquisitions, which it has announced previously, in Jun-Jul 2011. Hence, we expect CIT’s DPU to pick up in 2H11. However, there remains an acquisition with purchase price of S$41m that is not completed. Given that it is unlikely the outstanding acquisition will be completed in 3Q11, we lowered our FY11DPU estimate by 1.5% to account for the expected completion of the acquisition only in early 4Q11. However, due to half-year rolling forward of our DDM valuation, we raised our TP marginally to S$0.595 (COE: 10.1%, TGR: 1.0%). Maintain BUY.
Newly completed acquisitions to begin contributions in 3Q11. During Jun-Jul 2011, CIT completed three acquisitions which it announced in Oct 2010 and Mar 2011, namely, 4 & 6 Clementi Loop, 60 Tuas South Street 1, and 5 & 7 Gul Street 1. We expect these newly acquired properties to contribute 0.2-0.4S¢ in DPU for FY11-12 respectively.
Currently trading at 6.5% spread to 10-year bond yield. CIT is currently trading at 6.5% spread to 10-year bond yield, which is 194bps above its pre-crisis mean spread of 4.6%, based on FY11 DPU. Key risk to the stock is the concentration of lease expiry in 2013/2014 at >50% of total rental income. Upon 1) smoothing out lease expiry profile, 2) illustrating consistency in securing higher rentals during renewals, and 3) acquiring more good quality, yield accretive assets, we believe CIT will then be able to trade at higher valuation.
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