News

• Axis REIT (Axis) has proposed to acquire a parcel of 2.51 acres of industrial land erected with a single-storey warehouse building and other ancillary buildings at Kawasan Perindustrian Pasir Gudang, Johor, held under leasehold title for RM33m.

• The property with 163k sq ft is fully leased to Kerry Ingredients (M) Sdn Bhd at monthly rental of RM228.2k for a five-year lease ending Jan 14, 2019 with a renewal option already exercised for an additional two years till 2021.

• The proposed acquisition is targeted to be completed by 3Q 2016.

Comments

• We are positive on this yield-accretive acquisition with a net yield of 7.5% vis-à-vis its current yield of circa 5.1% and given the fact that the existing lease will not expire until 2021.

• Besides, the tenant's business in food ingredient manufacturing is non-cyclical, hence further providing diversification benefits to its ever growing asset portfolio base circa RM2.2bn post-acquisition.

• The acquisition will be fully funded by Axis’s existing debt facility, which will increase its gearing to around 35.17% post-acquisition, well below the prescribed gearing limit of 50%.

• Acquisition price worked out to be at RM202.5 psf, which is fai r for leasehold industrial space at Pasir Gudang Industrial area with appraised value at RM34m.

• Post-acquisition, we estimate Axis’s FY16 & FY17 bottom line will be boosted by around 0.3% (assuming four months contribution) and 1.55%, respectively.

Risks

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

Forecasts

• Incorporate earnings stream from this property which leads to a marginal increase in FY16 DPU to 8.8 sen from 8.77 sen.

Rating

HOLD , TP: RM1.60,

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

Negatives

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

Valuation

• Maintain HOLD recommendation with unchanged TP at RM1.60.
• Targeted yield remains unchanged at 5.5%, based on historical average yield spread of Axis REIT and 10-year MGS.

Source: Hong Leong Investment Bank Research - 24 May 2016