Highlights

• Occupancy rate: As at FY17, occupancy rate was at 91.1%. Across 40 properties, 28 properties enjoyed 100% occupancy. Vacancy portfolio stood at 717k sqft, along with that, the company has accepted 3 letters of offer (LO) to acquire industrial facilities in Negeri Sembilan, Selangor and Johor. These acquisitions, totalling 224k sqft are expected to complete within FY18 for RM150.7m.

• Gearing: The first tranche placement of RM180m was done in 4Q17 and we anticipate the second tranche placement of c. RM189m to be in 2H18. Currently, it’s gearing ratio stands at 33.1% and is expected to improve to 25.0% post placement exercise.

• Update on Axis Mega Distribution Centre (AMDC) : To recap, the AMDC in Telok Panglima Garang, Selangor is the first build-to-suit development undertaken by the company. The Phase 1 development of 515k sqft warehouse for Nestle Distribution Centre has been completed and handed over in February 2018. The 10-year lease with Nestle ( HOLD, RM112.20 ) will contribute RM19.2m to the group commencing in 2H18. There will be rental step-ups in later years and 2 renewal options of 3 years each. This entire development will have a healthy gross yield of 7.6% and it plans to commence Phase 2 development within FY18.
• Update on second build-to-suit development: Axis REIT has earlier proposed to develop a manufacturing plant-cum office building for Upeca Aerotech Sdn Bhd. A gross built up area of c. 179k sqft has been planned on the land subleased from MAHB, located at the Malaysia International Aerospace Centre Technology Park in Subang. Construction has begun with target completion and handover by end of FY18. The 20-year initial fixed leasing with a projected monthly rental of RM465k (rental step-up in later years) is expected to generate a gross yield of 5.9%.
• Outlook: Contrary to retail REITs, management remains optimistic on industrial space given the increasing demand from e-commerce players. Hence, we can expect the company continue to embark on such projects as it provides higher yield and longer term income stability.

Risks

• Concentration in a single REIT segment.

Forecasts

• Our FY18-FY20 earnings forecasts are reduced by 2.3%, 1.0% and 0.3% respectively, to reflect the increase in financing cost, the impact of dilution from upcoming placement and latest audited annual report figures.

Rating

• HOLD ↔ , TP: RM1.33

• Maintain HOLD recommendation given the impending 2nd tranche of placement which we anticipate in 2H18 despite the weakness in share price. We expect the benefits from the build-to-suit developments to emerge over a longer-term horizon and rerating of this stock may be warranted once the placement is done and de-gearing exercise is realized.

Valuation

• Maintain HOLD with a lower TP of RM1.33 (from RM1.52) based on FY18 DPU with unchanged targeted yield of 5.6%.

Source: Hong Leong Investment Bank Research - 15 Mar 2018