News

• Axis REIT (Axis) has announced the proposed development of a built-to-suit single-storey manufacturing plant cum office building of c.179k sqft gross build up area on a 7 acre land.
• Axis will first enter into a land lease agreement with Malaysia Airports Holdings Berhad (Buy, TP: RM9.60) to lease the project land for an initial sub-lease period of 30 years with renewal option. Total cost of the lease is estimated at RM19.88m which represents RM65 psf. Note that the consideration will be paid upfront as a lump sum amount.
• Axis will then undertake the development and the above mentioned manufacturing facilities will be leased to Upeca Aerotech Sdn Bhd upon completion at initial lease term of 20 years with option to renew for another 12 years and rental rate of RM5.58m p.a. for the first 3 years with rental step-up in later years.
• Total development cost inclusive of the sublease cost of the project land is estimated at RM74.16m. The development will serve for the purposes of manufacturing, storage and distribution of aerospace parts. The handover date of the development is targeted at 4Q18.

Comments

• The represents the 2nd development project for Axis after the redevelopment of PDI Centre. We are positive on this yield- accretive acquisition with starting net yield of 7% vis-à-vis its current yield of 5.44%. The property will be fully tenanted under a long leasing term.
• Net gearing is expected to increase to 38.8% post development as the development will be fully funded by Axis’s existing debt facility. However, the gearing could then be pared down to 23.4% with possible placement exercise of RM369.14m (illustrative issue price: RM1.49) later this year.

Risks

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

Forecasts

• Unchanged pending completion of the deal. The estimated impact to our earnings forecast from the development (without taking into account potential private placement) is about +2% after financing cost.

Rating

HOLD ↔ , TP: RM1.70 ↔

• Maintain HOLD recommendation as we expect the benefits from the revision of REIT guidelines to only emerge over a longer-term horizon and rerating of this stock will be warranted once (i) improved take up rate on its vacant/low occupancy properties; and (ii) securing near-term NLA expiry.

Valuation

• Maintain HOLD with unchanged TP of RM1.70. The TP is derived based on FY18 DPU with unchanged targeted yield at 5.1%.

Source: Hong Leong Investment Bank Research - 02 Nov 2017