Results

• Reported 9MFY16 gross revenue of RM127.7m (+0.61% yoy) which translated to normalized net profit of RM67.1m (- 4% yoy), accounting for 71.9% of our and 70.8% of consensus estimate.

Deviations

• Slightly lower than expectation due to higher and one-off maintenance cost in some of the properties.

Dividends

• Declared 3rd interim DPU of 2.05 sen (FY15: 2.2 sen), going ex on 3rd Nov 2016, represents an annualized yield of 4.7%.

Highlights

• Yoy, rental income grew marginally (1%) on the back of newly acquired assets at Beyonics i-Park Campus, partially offset by loss of income from PDI centre. However net profit was down 5.5% (excl. fair value gain) due to higher maintenance cost on the back of one-off works in some of the properties (incl. new properties added into portfolio).

• Qoq, revenue and net profit were largely flat. YTD, revenue grew marginally by 0.6% due to positive rental reversion, proceeds from newly acquired properties, but partly offset by the loss of rental income from asset under redevelopment. Nevertheless, net profit was down by 4% due to higher maintenance expenses and financing cost attributable to the acquisition, cushioned by improved management expenses ratio to 1.28% of NAV from 1.33% last year.

• In a separate announcement, Axis proposed disposal of Axis Eureka (purpose-built office building situated in Cyberjaya) of 116,903 sqft of NLA to Malaysian Qualifications Agency for a cash consideration of RM56.13m, to be completed by end of 2016.

• We are positive on the disposal given that i) the selling price is rather competitive at RM56m, vs its cost at RM51m and valuation at 55m; ii) low occupancy at circa 59% for a considerable period of time; iii) better utilization of proceeds to pare down gearing for further yield accretive acquisition. iv) intention to distribute RM1.2m (0.11 sen per unit) of the net gain.

• On the flip side, an estimated loss of income of circa RM4m p.a. from a decent yielding (>7%) asset, but we believe more acquisitions are in the pipeline to make up the loss.

Risks

• High concentration on logistic warehouse, office / industrial and manufacturing facilities.

• Slower rental reversion as compared to other M-REITs.

Forecasts

• Incorporate the effect from the disposal, resulting in lower net profit of 4.2% and 4% for FY17 and FY18, respectively.

Rating

HOLD ↔, TP: RM1.73 ↑

• We expect benefits from the revision of guidelines to emerge over a longer-term horizon. Rerating of this stock will be warranted once (i) the plan to pare down gearing is realized; (ii) improved take up rate on its vacant/low occupancy properties; and (iii) securing near-term NLA expiry.

Valuation

• TP revised to RM1.73 with targeted yield lowered to 5.1%, based on 1SD below historical average yield spread on 10- year MGS as we expect more developments in near future and benefits from the revision of guidelines in longer term.

Source: Hong Leong Investment Bank Research - 25 Oct 2016