News

• Axis REIT has proposed to acquire and lease back an industrial facility erected on seven parcels of leasehold land, all located at Port Klang, for a lump sum cash consideration of RM46m.

• Initial lease period of 15 years with an option to renew for 15 more years making a total of 30 years lease.

• Rental payment schedule: Period Rental (RM) First 3-year 363,604.10 Years 4-6 399,964.55 Years 10-12 439,961.00 Years 13-15 483,957.10

• The land is to be acquired from subsidiaries of Haisan Resources Bhd, a company that is principally engaged in temperature-controlled logistic business, engineering and also ice manufacturing.

• Subject to all terms being agreed between parties, SPA shall be signed within 14 days thereafter.

Highlights

• We are positive on the news given that the gross yield on the transaction is 8.8%, relatively higher than gross yield for properties acquired by Axis REIT (7.5%).

• Note that its contribution to top line is very minimal (2.2%), assuming full year cont ribution kicks in 2016. However, management is optimistic on this acquisition because the land, which is now a temperature-controlled logistic complex, is under-utilised and hence, they are upbeat in turning the vacant land into yield accretive investment in long term.

• We also understand from management that the acquisition is likely to be funded by cash. As at Dec 2014, Axis’s cash and cash balances stood at RM90.12m.

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 RE IT sector to government bonds.
• REIT sector could underper form in a bullish market as investors would prefer stocks which give higher capital appreciation.

Forecasts

• Unchanged pending further info upon signing of SPA.

Rating

HOLD , TP: RM3.53

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

Negatives

• Highly specialised portfolio on industrial / manufacturing properties makes Axis REIT the most sensitive to adverse changes in macroeconomics.

Valuation

• Maintain HOLD recommendation and TP of RM3.53.
• Targeted yield remain unchanged at 5.5%, 1.5SD below historical average yield spread of Axis REIT and 7-year MGS.

Source: Hong Leong Investment Bank Research - 23 Jun 2015