Results

• 9MFY15 gross revenue of RM123.8m was translated into normalized net profit of RM73.5m.

• Although top-line was in-line with ours and consensus expectations, normalised PAT only accounted for 69% of our full year estimates and 72% of consensus.

Deviations

• Higher than expected cost of non-property expenses in relation to newly-acquired properties (i.e. trustee fee, managers fee and administrative expenses).

Dividends

• Declared 3nd interim dividend of 2.2 sen (3QFY14: 2.5 sen), bringing YTD dividend of 6.4 sen (9M14: 7.8 sen).

Highlights

• Cumulatively, gross revenue grew by +21% yoy, emanated mainly from assets that were newly injected into the trust - Axis MRO Hub, Axis SADC 3, Axis Steel Centre @ SiLC and SADC 2.

• As four properties were added during the year, we note that property and non-property expenses have grown more than our earlier forecast. Moreover, there were GST related compliant cost and personal data protection act implementations. We do not view this negatively as NPI margin continues to be fairly stable at 86% (Figure #5).

• Occupancy rate during the quarter remains stable at 93% (Figure #6). Of of 516,304 sq ft vacant space, management has secured tenants to take up 30,000 sq ft by December 2015. Management also shared that it is challenging in the current environment to secure tenants and potential tenants are taking longer time to deliberate on their decisions.

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 underperform in a bullish market as investors would prefer stocks which give higher capital appreciation.

Forecasts

• We made changes in our forecasts as we factor in higher cost in relation to newly acquired properties. As a result, our FY15-17 DPU forecasts are cut by 5%.

Rating

• HOLD , TP: RM1.63
• Posi tives: 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 but TP cut to RM1.63 (previously RM1.72) post earnings adjustment.
• 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 - 20 Oct 2015