Axis REIT’s 9M18 core net profit of RM77.4m (+12.6% YoY) was within our expectations but below consensus’ expectations. Dividend of 2.35 sen per unit was declared. The improvement was primarily supported by new revenue contribution from newly acquired assets and positive rental revision, but slightly offset by the increase in property expenses and Islamic finance costs. We increase our FY18-20 earnings forecast by 3-4% after imputed the contribution of new assets, and continue to maintain HOLD call with higher TP of RM1.59 (was RM1.55) based on targeted yield of 5.7%.

Within expectations. 9M18 revenue of RM148.5m (+15.8% YoY) translated into a core net profit of RM77.4m (+12.6% YoY). The results were in line with our expectations but slightly below consensus’ expectations, accounting for 76.3% and 72.9% of full year forecast respectively.

Dividend. Declared 3Q DPU of 2.35 sen per unit (2Q17: 2.00 sen), going ex on the 1st

November 2018. Axis REIT also announced the implementation of the Income Distribution Reinvestment Plan (IDRP), of which 1.10 sen per unit (47%) can be elected to be reinvested in new units while the remaining portion of 1.25 sen per unit (53%) will be paid in cash.

QoQ/YoY. Revenue for 3Q18 of RM53.8m (+11.0% QoQ; +28.6%% YoY) translated to core net profit of RM29.3m (+19.5% QoQ; +33.0% YoY). The increase was mainly due to the newly completed acquisition of Beyonics i-Park Campus – Block E and Indahpura Facility 1 on the 9th of August. However, the increment was partially offset by the increase in property expenses and Islamic financing costs.

YTD. Revenue for 9M18 of RM148.5m increased by 15.8% from RM128.2m in corresponding period 9M17. Likewise, core net profit of RM77.4m showed an increment of 12.6% (9M17: RM68.8m). The boost was mainly contributed by the commencement of Nestle’s lease at Axis Mega DC on 1st June 2018 and rental contribution from newly acquired properties such as Axis Shah Alam DC4 (4th June 2018), Beyonics i-Park Campus – Block E and Indahpura Facility 1 (9th August 2018), as well as overall positive rental reversion of 6%. Nevertheless, the improvement was slightly offset by the increase in property expenses due to the new properties added into the portfolio (3Q18: 44 properties). Similarly, Islamic financing cost increased due to additional financing facilities utilised to fund new acquisitions.

Occupancy and gearing. Overall occupancy rate increased to 94.8% (3Q18: 93.9%). Gearing increased to 37.3% (FY17: 33.1%) following the drawdown to fund the recent acquisitions.

Forecast. Although the results were inline, we take this opportunity to include the newly acquired properties into our model; Axis Shah Alam DC4, Beyonics i-Park Campus – Block E and Indahpura Facility 1 which were completed in 3Q. Our FY18- 20 earnings were increased by 3.0%, 3.5% and 3.5% respectively. Likewise, our DPU forecast is raised by 2.4%, 3.3% and 4.0% for FY18-20.

Maintain HOLD, TP: RM1.59. Maintain our HOLD rating, with higher TP of RM1.59 (from RM1.55) after earnings forecast revision. 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 - 23 Oct 2018