Highlights

• We left Axis REIT’s 1HFY17 Results Briefing yesterday with slight positive bias.
• 1HFY17 results recap: Results came in within expectations with normalized net profit of RM46.8m (+4.89% yoy). The growth in profit is mainly contributed by the newly acquired Scomi Facility@ Rawang coupled with positive rental reversion and rental of 17.6 acres land at Axis PDI Centre.
• Improved occupancy rate and WALE: Occupancy rate declined to 89% yoy (from 92%) as at end of 1HFY17. Further improvement can be expected when occupancy rate of Axis Business Campus increases to c.50% (from 12%) by 4QFY17. Yoy the WALE profile has also improved to 4.51 years (from 4.41).
• Renewals: 35% of total NLA lease expiry in 2017 was renewed at a rental reversion of 5.94%. Moreover, Axis has secured almost 500,000 square feet of additional new tenancies.
• Capital management. Gearing currently stands at 34.5% and will increase to close to 40% once acquisition of property in Gebeng is completed. Axis is currently undertaking private placement and is aiming to bring down its gearing to c.30%. Note that the placement is likely to be undertaken in tranches instead of one-off.
• Capex: During the year, a total of RM6.2m was spent on enhancement works of the properties in the portfolio and RM53m has been incurred for development cost for the Nestle DC at Axis PDI Centre.
• Outlook: Management remains generally optimistic on industrial space given the increasing demand from e- commerce players. Total estimated value of acquisition targets is at about RM239m.

Risks

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

Forecasts

• Unchanged.

Rating

HOLD ↔ , TP: RM1.71 ↔

• 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

• Maintain HOLD with unchanged TP of RM1.71 (based on FY18 DPU with unchanged targeted yield of 5.1%).

Source: Hong Leong Investment Bank Research - 26 Jul 2017