Cache Logistics Trust - Defensive stock with attractive yields (OCBC)

Maintain BUY

Current Price: S$0.94

Fair Value: S$1.14

Defensive stock. We continue to maintain our positive view on Cache Logistics Trust (CACHE) and rate it as one of our preferred picks in the S-REIT space. Defensiveness and attractive yields have become the investment community buzzwords in recent months amid the market uncertainty, and we think CACHE fits into these themes smugly. The stock has posted a slight loss of 2.6% YTD, significantly outperforming FTSE ST REIT Index and STI, which were down 15.9% and 20.7% respectively during the same period. Operationally, CACHE is also relatively well protected from the market downturn and negative rental reversions due to the master lease arrangement for its portfolio. Specifically, this provides for long lease durations (weighted average lease to expiry of 5.1 years in 2Q11), with locked-in annual rental escalation of 1.5-2% and a triple-net lease structure for the contracted lease term, which in turn provides organic growth and earnings predictability for the group.

Attractive yields. CACHE also has one of the more attractive DPU yields in the sector. We estimate that the group would give out 8.3-8.6 S cents in FY11-12 (in line with Bloomberg consensus), representing yields of 8.8-9.1%. This is higher than the sector average consensus yields of 7.8-8.0%.

Acquisitions made are DPU accretive. CACHE made its maiden acquisitions in Mar, with the purchase of 6 Changi North Way and 4 Penjuru Lane, Singapore. In Jun, it announced that the acquisition of chemical warehouse facility in Shanghai from its sponsor CWT Limited, marking its foray into China. More recently, CACHE reported the completion of acquisition of purpose-built four-storey bonded warehouse at 22 Loyang Lane, Singapore. These acquisitions, we note, have NPI yields of 7.4-8.6% (relatively consistent with estimated NPI yield of 7.7% for its existing portfolio) and are DPU accretive.

Financial resources available. With additional debt headroom of ~S$60m before it reaches the regulatory aggregate leverage ceiling of 35% (from 30.2% currently) without a credit rating, CACHE has the financial resources to fund more acquisitions, possibly from CWT. We note that the latter has properties that are granted the Right of First Refusal to CACHE. We would not be surprised if the group announces more acquisitions in coming quarters, as several of these properties have completed construction.

Maintain BUY. We now revise our forecasts to include its 2Q11 results and contribution from 22 Loyang Lane. Our RNAVbased fair value now stands at S$1.14 (previously S$1.06), representing an attractive upside potential of 21.6% (excluding FY11F DPU yield of 8.8%). Maintain BUY on CACHE.