CACHE announced that it has entered into a call option agreement with industrial developer Precise Development (PDPL) to acquire Precise Two, a newly completed three- storey fully ramp-up warehouse with a gross floor area of approximately 284,381 square feet. Purchase consideration for the property is around $55.2 million. Subject to attaining regulatory approval from JTC Corporation, the acquisition is expected to be completed in April 2013.
Cache is beefing up its competitive position in the logistics space. Cache's planned acquisition of Precise Two is, in our opinion, hugely complementary to its existing portfolio strengths. Boasting approximately 23 per cent market share of Singapore's ramp-up logistics warehouses, Cache's proposed acquisition of Precise Two distinctly accelerates its competitive edge.
Cache is harvesting diversification rewards. Upon completion of the acquisition, Cache and PDPL would enter into an agreement to which Precise Two would be leased back to PDPL. As the master lease agreement provides for a lease term of six years with a renewal option for an additional six years, the acquisition would strengthen Cache's lease expiry profile and reduce its asset concentration risk on CWT Commodity Hub.
CWT Commodity Hub's revenue contribution is estimated to fall from 37.8 per cent to 36.5 per cent following the acquisition of Precise Two. Another plus for Cache would be a reduced reliance on master lessees CWT and C&P for rental income.
We assume that the acquisition of Precise Two would be financed entirely with debt. Given the 8.7 per cent initial net property income yield of Precise Two, we estimate that the acquisition would boost its 2013-2014 forward dividend yield of 6.6-6.7 per cent to 6.7-6.9 per cent.
Cache is loading up its acquisition cannon. Following Cache's Wednesday announcement that it had secured an investment grade credit rating from Moody's, we believe that Cache is now equipped with greater financial flexibility to support its inorganic growth. Assuming that the purchase of Precise Two is to be financed entirely with debt and a target gearing of 38 per cent, we estimate that Cache would have a remaining debt headroom of around $42.5 million, clearly underscoring a healthy acquisition appetite.
While we view the proposed deal as a positive strategic move, we believe that there is limited room for upside from current valuations. Maintain "hold" with a fair value of $1.370.
HOLD
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