SINGAPORE (Feb 2): Maybank Kim Eng is upgrading Cache Logistics Trust to "buy" with a 95-cent target price given its proposed acquisition of a portfolio of properties in Australia for $177.6 million ($188.3 million).
The portfolio of nine logistics warehouse assets are expected to achieve an initial 6.4% NPI yield and increase CacheLog's Australian AUM contribution from 17% to 28%.
"We raised DPUs by 1-3% following its largest overseas acquisition to-date, at A$177.6 million or $188.3 million," says analyst Chua Su Tye in a Friday report.
Maybank says the properties are supported by annual rental escalations of 2.0-3.5% and should improve CacheLog’s portfolio profile, with the target WALE of 5.0 years extending CacheLog's portfolio WALE from 3.2 years to 3.4 years.
Furthermore, overall portfolio occupancy will be lifted from 96.6% to 97.2%. The occupancy rate of the acquired Australian assets is 98.1%, supported by 13 tenants, including third-party logistics and other credit-quality names.
"The assets will strengthen its portfolio and reaffirm its overseas diversification push," says Chua.
Meanwhile, Phillip Capital and RHB are maintaining their "buy" calls on CacheLog with target prices of 93 cents and 98 cents respectively.
Phillip analyst Richard Leow says the new Australian properties will result in a more stable asset value for CacheLog. This is in contrast to Singapore where industrial land leases are 30 years or less which has the effect of declining property valuations as the remaining land lease shortens.
Phillip has raised its FY18 and FY19 revenue assumption by 10.8% and 12.4% and DPU assumption by 1.4% and 1.7%.
RHB says the acquisition is in line with CacheLog ongoing portfolio rebalancing strategy of divesting mature and shorter land-lease Singapore assets and increasing exposure to the freehold Australian market.
Although the NPI yields of the Australian properties are slightly lower compared to Singapore properties, these are mitigated by their freehold status, longer property WALE and in-built rental escalations.
"We revise higher our FY18-20 DPU by 2%-3% factoring in accretion from acquisition and taking into account the perpetual bond issuance. Our DDM-derived 98 cents target price is based on a cost of equity of 8% and terminal growth of 1%," says RHB analyst Vijay Natarajan.
OCBC is also positive on the acquisition given it would improve the portfolio profile of the REIT.
"To reflect what we consider a better portfolio diversification, we decrease our cost of equity from 8.5% to 8.3%," says analyst Deborah Ong whose fair value rises to $0.85 from $0.81.
In contrast, CIMB says the acquisition price tag looks "toppish" at 6.4% NPI yield for portfolio weighted average yield expiry (WALE) of five years and average building age of 17-18 years.
CIMB analyst Yeo Zhi Bin says the acquisition can only paper over existing portfolio weakness, including the effects of negative rental reversion eroding FY18 earnings and potential conversion of CWT Commodity Hub into a multi-tenanted building (MTB).
And while CacheLog's existing portfolio is showing initial signs of stabilisation, further evidence is needed before CIMB's view of the REIT can turn positive.
"Hold maintained with a higher target price of 88 cents. Potential catalysts include better clarity over the renewal of CWT Commodity Hub with lease expiring mid-Apr 2018," says Yeo.
Units in Cache Logistics Trust are trading at 88 cents.
