Axis REIT’s 1Q18 core net profit of RM237.m (+5.5% QoQ, +2.0% YoY) was within both ours and consensus expectations. The improvement was mainly contributed by higher contribution of rental proceeds from newly acquired properties and positive rental revision. Following the 2 nd tranche placement abortion, we lower FY18-20 earnings slightly by 2%-5% but raise DPU by 9.3%, 6.0% and 4.7% respectively, given the absence of further dilution. We maintain HOLD call with higher TP of RM1.44 (from RM1.33) based on targeted yield of 5.7%.

Within expectations. 1Q18 gross revenue of RM46.2m (+10.2% QoQ, +5.7% YoY) translated into a core net profit of RM23.7m (+5.5% QoQ, +2.02% YoY). The results were within both ours and consensus expectations, accounting for 22.6% and 22.7%, respectively.

Dividend. Declared 1Q DPU of 1.94 sen (1Q17: 2.15 sen), which represented a payout ratio of 99.6%, in line with our expectation.

QoQ. Gross revenue of RM46.2m showed an increment of 10.2% (from RM41.9m in 4Q17). Core net profit also increased by 5.5% to RM23.7m. The increase was driven by the commencement of tenancy at D21 Logistics Warehouse in the quarter, and higher contribution from Kerry Warehouse and Wasco Facility. Axis REIT attained a positive rental reversion of 2.8% in 1Q18. The increment was slightly mitigated by the increase in property expenses by 2.9% due to the additional new properties added into the portfolio and also the increase of 9.2% of Islamic financing cost to RM8.9m due to additional financing facilities utilised to fund the new acquisition.

YoY. Gross revenue for 1Q18 increased by 5.7% while core net profit was marginally higher by 2%. The increase was mainly due to the contribution of rental proceeds from newly acquired Kerry Warehouse and Wasco Facility, paired with positive rental reversion. The rise was partially being offset by the increase in property expenses and financing costs.

Occupancy and gearing. Out of 41 properties, 30 properties enjoyed 100% occupancy. Overall occupancy rate increased to 93.6% from 91.1% in 4Q17. Gearing increased to 35% (from 33% in 4Q17), with plenty of headroom for further acquisitions.

Outlook. We expect a better 2H18 with the contribution of the Axis Mega Distribution Centre.

Forecast. Although the results were inline, we take this opportunity to adjust our FY18-20 earnings marginally lower by 2%-5%. This follows from its recent announcement on the abortion of its 2 nd tranche proposed private placement. Despite the slightly reduced earnings, our DPU forecast is raised by 9.3%, 6.0% and 4.7% for FY18-20 given the absence of further dilution from the placement abortion.

Maintain HOLD, TP: RM1.44. While we maintain our HOLD rating, our TP is raised from RM1.33 to RM1.44 following the higher DPU projections. Our TP is based on FY18 targeted yield of 5.7% which is derived from 2 years historical average yield spread of Axis REIT and 10 year MGS.

Source: Hong Leong Investment Bank Research - 26 Apr 2018