FY18’s improved performance was mainly contributed by inorganic revenue contribution from new assets. Occupancy rate improved to 94% (FY17: 91%), with 34 properties hitting 100% tenancy while gearing increased to 37.3% (FY17: 33.1%). Management remains focus on industrial space which includes logistics, manufacturing and warehousing properties. We factored in 2 new revenue contribution, increasing our FY19-20 earnings by 6.6%-6.5%, followed by FY19-20 DPU increase of 6.6%-6.4%. We maintain our HOLD call with higher TP of RM1.73.

We Left Axis REIT’s FY18 Results Briefing Yesterday With Slight Positive Bias.

FY18 results recap. Results came in slightly above our expectations but within consensus, with core net profit of RM113.5m (+24.4%). The deviation was due to higher-than-expected revenue. The boost mainly came from fresh rental contribution from newly acquired properties; (i) Axis Shah Alam DC4 (4th June 2018), (ii) Beyonics i-Park Campus – Block E and (iii) Indahpura Facility 1 (9th August 2018) and (iv) Senawang Industrial Facility (5th December 2018). This came along with lease commencement of (i) Nestle at Axis Mega DC (1st June 2018) and (ii) Upeca Aerotech Sdn Bhd at Axis Aerotech Centre (16th December 2018). However, the improvement was slightly offset by the increase in property expenses due to the new assets added into the portfolio (FY18: 45 properties, FY17: 40 properties). Similarly, Islamic financing cost increased due to additional borrowing facilities utilised to fund new acquisitions.

Occupancy and gearing. Occupancy rate increased to 94% as at FY18 (FY17: 91%). Out of 45 properties, 34 properties enjoyed 100% tenancy. Vacancy in the portfolio currently stood at 6% with 563,947 sq ft. Gearing increased to 37.3% (FY17: 33.1%).

Renewals. Axis achieved a positive rental reversion of 5% along with a tenant retention rate of 74% for FY18. Moreover, Axis has secured approximately 1.6m sq ft of space through new tenancies and tenancy renewals.

Outlook. We expect a better FY19 with full year revenue contribution from acquired properties in FY18. Management guided that its focal point continues to be on Grade A logistics and manufacturing facilities with single tenancy and long leases together with well-located retail warehousing that are ideal for last mile distribution. Total estimated value of FY19 acquisition targets is guided at approximately RM200m.

Forecast. We included in our model the newly acquired, Senawang Industrial Facility (Figure #2) together with the commencement of lease at Axis Aerotech Centre in December 2018. Our FY19-20 earnings increased by 6.6% and 6.5% respectively. Likewise, our DPU forecast is raised by 6.6% and 6.4% for FY19-20.

Maintain HOLD, TP: RM1. 73. We maintain our HOLD rating, with higher TP of RM1.73 (from RM1.62). Our TP is based on targeted yield of 5.6% which is derived from 2 years historical average yield spread of Axis REIT and 10 year MGS.

Source: Hong Leong Investment Bank Research - 24 Jan 2019