SELL (from HOLD)
Target price: SGD1.05 (from SGD1.25)
Valuations look rich; Capital value at risk.
Capital value at risk. We see industrial REITs facing major downside risks from the impending hike in interest rates and possible recalibration of over-inflated property prices – both of which can drag down NAV. The physical capital values of industrial properties have doubled in the past four years compared with only a 20-50%rise in the other segments. The price-rental mismatch has also proven to be the most staggering. With rentals currently at an all-time high from 2008 peaks, we anticipate slower growth in FY14.
Lingering headwinds. Other challenges include a fragile global macroeconomic outlook and ample supply in the pipeline. We also see Iskandar Malaysia will pose competition in the medium term, especially for lower value-added industrial activities within Singapore. Empirical evidence suggests that warehouse rents and asset values in Singapore are, respectively, 2.5x and 8.5x higher than in Iskandar Malaysia.
Credit rating from Moody's. We are heartened that CACHE has, for the first time since its IPO, obtained a corporate rating from Moody’s (Baa3 with stable outlook). This means that it will be able to leverage up to 60% from the current restriction of 35% for REITs without a credit rating, As of 31 Sep 2013, its gearing stands at 29.2% with SGD313m in borrowings. It still has debt headroom of SGD193m before hitting 40% gearing.
Downgrade to SELL. Warehouse rental in Singapore will progressively ease with 22% of available stock of warehouse space (private sector; 17m sq ft) coming on-stream in 2013-2017. CACHE has 36% of GFA up for renewal in 2015 and 33% in 2016. We remain wary of its inherent concentration risk on its main master lessee, CWT/C&P. Based on our estimates, CWT/C&P and its associated companies account for almost 90% of CACHE’s FY12 gross rental income. At FY13F DPU yield of 7.5% and P/BV of 1.2x, we think valuations are on the high side. Pending further acquisitions and asset enhancement initiatives, we see risks skewed to the downside on imminent US Fed tapering. Downgrade to SELL with a new TP of SGD1.05.
Publish date: 06/12/13