News

• Axis REIT (Axis) has proposed to acqui re and lease back 4 single storey detached factories, annexed with two-storey office building under freehold land, located at Kawasan Perindustrian I-Park, Kulaijaya, Johor for a lump sum cash consideration of RM61m.

• The land is to be acquired from Axis AME IP Sdn Bhd, a related party to certain Directors of Axis.

• Currently the land is utilized by Beyonics Techonology (Senai) Sdn Bhd, a manufacturer of plastic precision components, mould and electronic manufacturing services and the lease will continue after the acquisition.

• Initial lease period of 10 years with an option to renew for 3 more years with further option to extend for another 2 years upon expiry of lease term and the agreed monthly rental payment schedule are as following: Period Rental (RM) First 3-year 403,632.6 Years 4-6 461,294.4 Years 7-10 518,956.2

Highlights

• Having aborted its plan to acquire an industrial facility in Port Klang, Selangor, we are positive that the management has got an alternate acquisition plan on the table and at very reasonable pricing despite it being a related party transaction as the RM61m price tag represents a 37% discount to the reported book value of the property.

• The acquisition will be fully funded by Axis’s existing debt facility, which will increase its gearing to around 34.69%, still below the prescribed gearing limit of 50%.

• We are also positive that these properties are fully occupied and ready to be injected into Axis at a decent yield of 7.9% vis-à-vis its current yield of 5.6%.

• Should the acquisition materializes, Axis’s FY16 & FY17’s bottom line will be boosted by around 3.6% and 3.5%, respectively, with an agreed rental step up rate at 14% in FY19 and another 12.5% in FY22.

• With unchanged payout ratio of 96%, this recurring income stream will increase FY16 DPU to 9.1 sen (8.8 sen).

Risks

• High concentration on logistic warehouse, office / industrial and manufacturing facilities.
• Slower rental reversion (only 2 – 3% per annum) as compared to other M-REITs (5 – 7% per annum).

Forecasts

• Revised target price to RM1.65 post acquisition.

Rating

• HOLD , TP: RM1.65
• Positives: We like the uniqueness of the trust given its mixed exposure to industrial properties compared to the other players of M-REITs.
• Negatives: Highly specialised portfolio on industrial / manufacturing properties makes Axis REIT the most sensitive to adverse changes in macroeconomics.

Valuation

• Upgrade TP to RM1.65 from RM1.63 with no change on HOLD recommendation.
• Targeted yield remain unchanged at 5.5%, 1.5SD below historical average yield spread of Axis REIT and 7-yr MGS.

Source: Hong Leong Investment Bank Research - 12 Nov 2015