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Broker's take: OCBC upgrades Cache Logistics Trust to 'buy'; DBS maintains 'hold'

OCBC Investment Research has upgraded its call on warehouse owner Cache Logistics Trust (Cache) from "hold" to "buy", citing a sector upturn in 2019, while DBS Group Research has maintained a "hold" rating on the counter. 

OCBC has a fair value estimate of S$0.81, while DBS's 12-month target price is S$0.88, representing a 14 per cent upside from the stock's July 31 close. 

As at 11.32am on Wednesday, the counter was trading at S$0.78 apiece, up 1.3 per cent. 

Across the board, both brokerages agree that Cache's Q2 results came in within expectations. Gross revenue increased 7.7 per cent to S$30 million, with the uptick driven largely by the acquisition of nine warehouse properties in Australia. 

In addition, net property income (NPI) dipped 0.1 per cent year-on-year (y-o-y) to S$21.6 million, while distributable income fell 6.3 per cent y-o-y, weighed down by the S$1.4 million reserved for distribution to perpetual security holders. 

"DPU (distribution per unit) from operations and capital fell 17.6 per cent y-o-y to 1.419 Singapore cents, or 23.3 per cent of our initial full-year forecast, mainly due to the 13.7 per cent larger unit base following last year's rights issue," OCBC said. 

The brokerage also noted that there has been progress made at CWT Commodity Hub, which managed to increase its committed occupancy rate from 86 per cent in Q1, to 92.7 per cent after its master lease conversion in the latest quarter. 

"Going forward, we expect the challenging environment within the industrial space to continue for most of the rest of the year, before seeing daylight towards the end. Management has also shared that they expect to see a bottoming of rents this year," OCBC said. 

"Given that only 3.1 per cent of Cache's portfolio by gross rental income is up for renewal for the rest of 2018, while 28 per cent is up for renewal in 2019, we believe that Cache is reasonably positioned for the industrial sector recovery."

OCBC says it is looking forward to the industrial sector bottoming at the end of this year or early-2019, and believe that Cache is ready to participate on the upturn. The brokerage sees an opportunity to collect Cache units two to three quarters before clearer signs of operational improvement are seen.

"With the rising interest rate environment, our cost of equity increases from 8.3 per cent to 8.5 per cent. After adjustments, our fair value falls slightly from S$0.83 to S$0.81," OCBC said. 

Similarly, DBS noted that while rental reversions (excluding CWT Commodity Hub) is still negative at -4 per cent, "given improving supply-demand dynamics, Cache is cautiously optimistic of the bottoming out of the warehouse market by end-2018, which could help drive a pick-up in rents from fiscal 2019".

The brokerage also noted that Cache's gearing levels have improved sequentially from 38.5 per cent in March, to 35.3 per cent in June, following a partial repayment of debts using proceeds from its rights issue, and the divestment of 40 Alps Ave.

Looking ahead, DBS noted that the trust has plans to leverage manager ARA's network to drive acquisition-led growth in Asia. 

"While Australia remains attractive for Cache, Korea may also be of interest for the Reit given freehold land tenures," DBS said. 

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