Highlights

• Axis REIT was established on 16 June 2005 and subsequently debuted on Bursa Malaysia on 3 August 2005 under revised Securities Commission’s Guidelines on REITs. On 11 December 2008, it has been reclassified as an Islamic REIT, which also positioned itself as the first listed Islamic office / industrial REIT globally.

• Axis REIT initially started with only five properties and has been expended into 33 properties which consist of office, office / industrial, manufacturing facilities, warehouse / logistics and hypermarket.

• Competitive strengths:

• Long term high quality tenants.

• Unique exposure on industrial properties.

• Track record of acquiring yield accretive assets.

• Shariah compliant REIT.

• Managed by experienced leadership team.

• Investment thesis:

• Series of aggressive acquisitions: We favour Axis REIT over its series of active acquisitions in M-REITs industry. In 2014, Axis REIT has entered into 4 sale and purchase agreements with total purchase consideration of RM434.4m and average net yield of 7.1% before Islamic financing cost.

• Riding on Iskandar industrial boom: The promoter of Axis REIT is developing a premier industrial city in Iskandar Malaysia with GDV of RM600m. We view this as a positive sign of future asset injections given that logistic warehouse, office / industrial and manufacturing facilities accounted for 44.51%, 29.02% and 8.04% respectively of the total portfolio held by Axis REIT.

• High distribution policy: The dividend policy is set at minimum of 95% of distributable income for the first three quarters of financial year and at least 99% in the final quarter, which is well above 90% as prescribed by SC REIT Guidelines.

Risks

• High concentration on logistic warehouse, office / industrial and manufacturing facilities subject Axis REIT to risk of significant slowdown in economic activities.
• Slower rental reversion (only 2 – 3% per annum) as compared to other M-REITs (5 – 7% per annum).
• Rise in interest rate will shift investor’s appetite from REIT sector to government bonds.
• REIT sector could underperform in a bullish market as investors would prefer stocks which give higher capital appreciation.

Rating

HOLD, TP: RM3.57

• We like the uniqueness of the trust given its exposure on industrial properties unlike the other players of M-REITs which are either retail or office or combination of both.

Valuation

• We derived Axis REIT’s target price of RM3.57 from targeted yield of 6.2% based on historical average yield spread of Axis REIT and 7-year MGS.

We initiate coverage of the stock with a HOLD rating, as our target price (including expected dividend return) offers a 7.0% upside over current price of RM3.54.

Source: Hong Leong Investment Bank Research - 23 Jan 2015