Highlights

• We left Axis REIT?s FY16 Results Briefing yesterday with slight positive bias.
• FY16 results recap: Results came in within expectations with normalized net profit of RM91.7m (+0.1% yoy). FY16 DPU amounted to 8.25 sen (FY15: 8.40 sen) represents an annualized yield of 5% at current price. The lower dividend was mainly caused by the loss of income in PDI Centre, partially offset by income from newly acquired properties.
• Improved occupancy rate and WALE: The occupancy rate improved slightly to 92% as at end of FY16. Further improvement can be expected when Axis Vista is fully tenanted by 1QFY17 (vacancy rate: 34.7%), which is estimated to increase the rental income by about RM1.3m p.a. The WALE profile has also improved to 4.33 (from 3.89) following the completion of five acquisitions in 2016.
• Renewals: 27.6% of total NLA lease expiry in 2016 was renewed with a retention rate of 86% at a rental reversion of 3%. In 2017, management is targeting for circa 90% retention rate on the 17.8% expiring NLA, out of which 21.4% has been renewed so far.
• Update on PDI Centre: A positive update on the other half of 50 acres land, whereby it is currently being leased out as a vehicle storage yard generating rental income of RM150k per month. Whereas the RM211m redevelopment on the other half is on track to be delivered to Nestle in 2018.
• Capital management. Gearing currently stands at 35% and will decrease to 33.5% once Axis Eureka is being disposed. However it is expected to rise above 35% again following planned acquisitions that are under negotiations. Possible placement could be on cards in 2H17 to pare down debt level once it surpasses internal threshold of 35%.
• FY17 Outlook: Management is generally still optimistic on industrial space, especially large purpose-built industrial assets and is on pace to achieve its target AUM of RM3bn by 2018.

Risks

• Risk in concentrated office/industrial and manufacturing facilities.
• Slower rental reversion as compared to other M-REITs.

Forecasts

• Unchanged.

Rating

HOLD ↔, TP: RM1.72 ↔

• Maintain HOLD recommendation as we expect the benefits from the revision of REIT guidelines will only emerge over a longer-term horizon and 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 unchanged at RM1.72 with unchanged targeted yield of 5.1%, based on 1SD below historical average yield spread on 10-year MGS as we expect more developments and benefits from the revision of guidelines in longer term.

Source: Hong Leong Investment Bank Research - 20 Jan 2017