News

• Axis REIT (Axis) has proposed to acquire a parcel of 663,800 sqft of industrial land held under freehold title, erected with 2 single-storey factory building with a 3 and 4- storey office annexe, a single-storey Pre-Delivery Inspection factory, a single-storey fibre glass factory and other ancillary buildings at Sungai Choh, Rawang, Selangor for RM42m.

• The property with NLA of 290,990 sqft will then leaseback to Scomi Engineering Bhd at the agreed monthly rental of RM 281,647.08 (step up rate of 10% every 3 year) for a period of 15 years from SPA completion date with an option to renew for another 5 years. The proposed acquisition is targeted to be completed by 4Q 2016.

• Comments

• We are positive on this yield-accretive acquisition with a net yield of 7.3% vis-à-vis its current yield of circa 5%. The property will be fully tenanted under a long leasing term.

• With this acquisition, its asset portfolio will grow to 40 assets with port folio value circa RM2.2bn post-acquisition, which will provide further diversification and achieving better scale.

• The acquisition will be fully funded by Axis’s existing debt facility, which will increase its gearing to around 38% postacquisition, well below the prescribed gearing limit of 50%.

• Acquisition price worked out to be at RM144 psf, which is fair for freehold industrial space at Sungai Choh Industrial area vs the net book value of at RM39m.

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

• Estimated impact to our bottomline is circa 1-2% after financing cost. However, we make no changes to our forecast pending 2HFY16 results announcement on 4th August 2016.

Rating

HOLD, TP: RM1.68

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

• 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 RM1.68.
• Targeted yield remains unchanged at 5.3%, based on historical average yield spread of Axis REIT and 10-year MGS.

Source: Hong Leong Investment Bank Research - 2 Aug 2016