Highlights

• We recently met with management team of Axis REIT and left with slight optimism on the company.

• Recap of FY15. FY15 gross revenue of RM165.68m was translated into normalized net profit of RM94.2m with DPU of 8.4 sen (yield @ 5.4%).

• Occupancy rate and lease expiry. Overall occupancy rate was healthy at 92% while tenant retention rate and rental reversion were at 82% and 8%, respectively. The vacant spaces translate to a potential DPU upside of 2 sen. To our comfort, management shared that take up rate has been improving in 4QFY15. Management is also more optimistic moving forward and improving the retention rate for the upcoming 27.6% of NLA expiry.

• Acquisi tion mode but... Apart from the ongoing acquisitions of logistics warehouse in Nusajaya and Pasir Gudang (which we have yet to factor in), upcoming potential acquisitions in various locations amount to circa RM369m. As such, growing the AU M to reach RM3bn by 2018 is on track. However, as the gearing is now close to the internal threshold of 35%, potential dilution maybe on the cards. Consequently, future acquisitions will likely be funded mainly by placement of up to 20% new units, potentially raising more than RM320m (assuming 5% discount).

• Update on Properties. PDI Centre may need to be taken off the book given that development is not allowed under REIT guidelines to develop it into a 1.2m sq ft mega distribution centre. While the potential injection of this cent re could fetch as high as RM400m, the earliest timeline would be in 2H18. Whereas Axis Business Campus is expected to undergo refurbishment to become multi-tenanted properties moving forward, with potential income of RM4-5m per year.

• Seemless Transition. Management shared that the strategy and vision are still largely intact with the stance as a longterm real estate investor prioritising capital value gain. The team is well-structured to run efficiently with little fuss post transition of the management.

• Yield Haven. In times of uncertainties, REIT may be a good haven for yield return given its defensive nature, reinforced by the scarcity of shariah-compliance status in this sector.

Risks

• High concentration on logistic warehouse, office / industrial and manufacturing facilities.
• Prolonged erosion in consumer sentiment.
• Slower rental reversion as compared to other M-REITs.

Forecasts

• Incorporating updated numbers post review of annual report .

Rating

HOLD , TP: RM1.60

• Posi tives: We like the uniqueness of the trust given its mixed exposure to industrial properties compared to the other players of M-REITs.

Negatives

• : Highly specialized portfolio on industrial / manufacturing properties makes Axis REIT sensitive to adverse changes in industrial policy.

Valuation

Maintain HOLD call with unchanged TP of RM1.60 based on targeted yield of 5.7% (historical average yield spread of Axis REIT and 10-year MGS).

Source: Hong Leong Investment Bank Research - 4 Mar 2016