1H18’s improved performance was mainly contributed by new revenue contribution from new assets, which we expect to follow through in 2H18. Occupancy rate improved to 94% (1H17: 91%), with 31 properties hitting 100% occupancy. Gearing increased to 36.5% (1H17: 35.5%) and is expected to further rise after the completion of acquisition of industrial properties in Kulai and Senawang. Axis REIT remains generally optimistic on industrial space and is expecting a better 2H18 due to expected completion of development of Axis Aerotech Centre and acquisitions. We maintain our forecast and maintain our HOLD call with unchanged TP of RM1.55.

We Left Axis REIT’s 1H18 Results Briefing Yesterday With Slight Positive Bias.

1H18 results recap. Results came in within expectations with core net profit of RM48.2m (+3.0%). The improvement was mainly contributed by the newly acquired Kerry Warehouse (July 2017), Wasco Facility (December 2017) and Axis Shah Alam DC4 (June 2018) coupled with positive rental reversion (c.5%) and the commencement of Nestle’s lease at Axis Mega Distribution Centre (Axis Mega DC) (June 2018). Notably, Nestle is now Axis REIT’s top tenant.

Improved occupancy rate. Occupancy rate increased slightly to 94% as at end 2Q18 (from 1Q18: 93.6%, 1H18: 91%). Further improvement can be expected when occupancy rate of Axis Business Park increases to c.60% by 3Q18. Out of 42 properties, 31 properties enjoyed 100% occupancy. Vacancy in the portfolio currently stood at 544,440 sq ft and we estimate that circa 1.1 sen will add to the annual DPU of 8.2 sen once the current vacant spaces are filled.

Renewals. 61% of total NLA lease expiry in 2018 was renewed at an average rental reversion of 5%. Moreover, Axis has secured approximately 1.4m sq ft of space through new tenancies and tenancy renewals.

Capital management. Gearing rose to 36.5% vs. 35.5% in 1H17 due to acquisition of Axis Shah Alam DC4 and is expected to rise further after the completion of acquisition of industrial properties in Kulai and Senawang. To fund future acquisitions in the pipeline, we believe Axis REIT may raise funds via placements in 2019.

Capex. During the year, a total of RM4.1m was spent on enhancement works of the properties in the portfolio and RM37.5m has been incurred for development cost for the Axis Mega DC (Phase1) and Axis Aerotech Centre Project @Subang.

Outlook. We expect a better 2H18 with revenue contribution from Axis Mega DC and Axis Shah Alam DC4, completion of development of Axis Aerotech Centre @ Subang and the expected completion of acquisitions in Kulai and Senawang. Axis REIT continues to focus on Grade A logistics and manufacturing facilities with single tenancy and long leases. As management remains generally optimistic on industrial space given the increasing demand from e-commerce players, Axis REIT plans to commence development of Phase 2 of Axis Mega DC in 2H18. Total estimated value of acquisition targets is at about RM190m.

Forecast. Maintain.

Maintain HOLD, TP: RM1.55. We maintain our HOLD rating, with unchanged TP of RM1.55. Our TP is based on 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 Aug 2018