News

• Axis REIT (Axis) has announced the proposed phase 1 development of a built-to-suit single storey warehouse of 515k sqft NLA on a 24.78 acres land (part of its existing PDI Cent re of 48.3 acres) at Kuala Langat, Selangor for a total development cost of RM210.93m.

• The warehouse will then be leased to Nestle Products Sdn Bhd as a warehouse operation at initial lease term of 10 years and rental rate RM19.22m p.a. with rental step-up in later years upon completion and necessary approvals being obtained. The estimated date of completion is on 1QFY18.

Comments

• The announcement is consistent with our previous update and we are positive on this yield-accretive development with a gross yield of 7.6% (inclusive of the original acquisition cost by proportion of the land size) vis-à-vis its current yield of circa 4.6%. The original PDI Centre acquisition cost was RM85m back in 2010 (book value at RM85.165m as at 30 Jun 2016) and it has been vacant since 4QFY15.

• This development allows Axis to venture into the development phase and capitalize the growth in gross rental income from approximately RM9m p.a. from previous lease term for the entire land parcel of 50 acres to RM19.22m p.a. (RM3.11 psf) for half of the total land parcel, despite income only kicking in by FY18.

• Management has guided no dilution of earnings/DPU as all the development cost will be capitalized. While the actual interest cost will incur during the development period which may undermine thei r cash position and ability to sustain the DPU payout, we understand that management will gear up and ensure the DPU payout is unaffected.

• Gearing may increase to circa 43% as the development will be fully funded by Axis’s existing debt facility. However, the gearing could then be pared down to circa 24% level with possible placement exercise of up to RM351.40m (illustrative issue price: RM1.62) later this year.

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

• We incorporate the rental income and the development costs into our model. No change in FY16 &17 DPU forecasts as all the development costs are assumed to be capitalized.

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 - 22 Aug 2016