Axis REIT has proposed to acquire two industrial properties for a total sum of RM38.7m. Upon completion in 3Q18, the properties shall be leased to BPM and OBCM for a fixed period of 10 and 7 years, respectively. We are positive on the news as we opine that the acquisition prices are fair and yield accretive. We maintain forecast pending completion of the acquisitions. We maintain HOLD with unchanged TP of RM1.44 based on unchanged targeted yield of 5.7%.

NEWSBREAK

Axis has proposed to acquire two industrial properties with a combined area of approximately 251k sqft, situated within Kawasan Perindustrian i-Park, Bandar Indahpura, Kulai Johor. The properties are located strategically within one of the main development corridors under Iskandar Malaysia. Each of the property comprises of a single-storey detached factory with mezzanine office and other ancillary buildings.

The proposed acquisitions will cost RM38.7m, to be funded by existing bank facility. They are expected to be completed in 3Q18. The properties have 100% occupancy rates as of 7 June 2018.

Upon completion, both properties with a combined lettable area of 166k sqft shall be leased to Beyonics Precision Malaysia Sdn Bhd (BPM) and Oerlikon Balzers Coating Malaysia Sdn Bhd (OBCM) respectively. BPM shall lease the property for a fixed period of 10 years (expiring in 2027) at an agreed monthly rental of RM186k per month for the first 3 years; while OBCM shall lease the property for a fixed period of 7 years (expiring in 2024) at RM43k per month, both with options to renew for further terms.

HLIB’s VIEW

Positive on the acquisition. We are positive on the proposed acquisitions as they are yield accretive, given the net yield of 6.8% and 6.9%, respectively (before Islamic financing cost) vs its current yield of 5.4%. The properties will be fully tenanted under fixed long lease term of 10 years and 7 years, respectively, which further minimize the risk to Axis. The acquisition price works out to be RM154.4 psf, which is fair for freehold industrial space in Kulai Johor. Also, the acquisition price of RM38.7m is lower than the market value of at RM40m based on valuations by independent valuers.

Gearing. Axis intends to utilise debt facility of approximately RM38.7m from its existing credit lines. Axis’s gearing ratio is expected to increase to 34.1% from current’s 33.1%. This is still comfortably below the gearing limit of 50%, leaving room for more future acquisitions.

Forecast. We maintain our forecast pending completion of the acquisitions.

Maintain HOLD, TP: RM1.44. We maintain our HOLD rating at TP RM1.44 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 - 8 Jun 2018