Attractive 9% yield provides good downside protection

SYNOPSIS: Growth from proactive capital management, accretive acquisitions and positive rental reversion. Trading at 9.2% below book value. Target price of S$0.88. Maintain BUY.

RESULTS REVIEW
Cambridge Industrial Trust (CIT) reported 1QFY08 results with DPU of 1.588cts, which is about 1.3% higher than DPU of 1.568 cts in 4Q07. The better results were due to the acquisition of two properties in 1QFY08, specifically 6 Tuas Bay Walk and 21B Senoko Loop, the completion of asset enhancement of Tuas Ave 3 towards end Feb 2008 as well as full quarter impact of 4Q07 acquisitions. The results were in line with our FY08 forecast. NAV per share is maintained at S$0.76.

PRO-ACTIVE CAPITAL MANAGEMENT TO LOWER DEBT
Pro-active debt management strategy has enabled CIT to gradually lower debt cost, further enhancing distribution income. Taking advantage of the lower interest rate environment in Feb 2008, CIT entered into a S$358.0m interest rate swap over a tenor of 5.5 years at an interest rate of 2.58% p.a. with HSBC to fully hedge against interest rates volatility on its outstanding loans. This has effectively lowered all-in debt costs from about 3.5% as at 31 Dec 2007 to about 3.3% for the tenor.

AMMUNITION FOR ACCRETIVE ACQUISITIONS
With the success of its first secondary offering in October 2007, raising S$193.9m, CIT’s gearing is healthy at 36.9% as at 31 Mar 2008. The enlarged capital base will enable CIT to embark on another $131m worth of debt-funded asset acquisitions before the gearing hits 45%. Since listing, CIT has acquired 15 properties worth S$367.7m. In the pipeline are signed option agreements worth S$18.0m and signed MOUs for property acquisitions worth S$75.2m as at 24 April 2008.

ACCRETIVE ACQUISITIONS SET TO CONTINUE
According to Colliers International, there are approximately 97.9m sq ft of investment grade industrial property, worth between S$15b to S$17b, available for acquisition in Singapore. With funding in place for acquisitions, over the next 12 months, CIT will also explore offshore acquisitions in Malaysia and China by leveraging off existing tenants (CWT and YCH), Mitsui and Oxley relationships.

DISTRIBUTION INCOME BACKED BY STABLE INCOME WITH GRADUAL GROWTH
According to the Ministry of Trade and Industry, Singapore’s economic growth is expected to moderate but remain healthy at between 4%-6% in 2008. With demand for industrial space underpinned by economic growth, the outlook for industrial properties in Singapore is expected to remain positive. CIT’s distribution income is backed by longterm leases (of approximately 6.3 years of remaining lease term as at 31 March 2008) and step-up rental terms structured on its 42 properties. Backed by healthy economic fundamentals, CIT’s portfolio is expected to continue to provide long-term stability and gradual DPU growth from
rental reversions.

VALUATION & RECOMMENDATION
Taking into account lower costs of debt and S$18.0m worth of signed option agreement, we value CIT at S$0.88 per share. At S$0.69, CIT is trading at a 9.2% discount to asset value. Further, CIT offers attractive yield of about 9% (FY08F), which is higher than its sector peers. We maintain our BUY recommendation.

[This article is contributed by NRA Capital Pte. Ltd., a licensed Financial Adviser by the MAS. Readers of this content are bound by the same terms & conditions of our website www.netresearch-asia.com .]