Axis REIT’s 1Q19 core net profit of RM28.9m (+21.8% YoY) was within both ours and consensus’ expectations. Dividend of 2.35 sen per unit was declared. The improvement was primarily supported by revenue contribution from newly acquired assets, but slightly offset by the increase in property expenses and Islamic finance costs. We updated our projection based on FY18 audited account which resulted to a revised EPU19-20 of -3% and -4% respectively. Following the dovish tone by major central banks and BNM, we revise our 10- year MGS yield assumption to 3.9% (from 4.1%) and roll forward valuation to mid FY20. We maintain HOLD call with higher TP of RM1.74 (from RM1.73) based on targeted yield of 5.4% (from 5.6%).

Within expectations. 1Q19 gross revenue of RM56.4m (+22.0% YoY) translated into a core net profit of RM28.9m (+21.8% YoY). The results were within both ours and consensus expectations, accounting for 23.7% and 24.0%, respectively.

Dividend. Declared 1Q DPU of 2.35 sen going ex on 13 May 2019 (1Q18: 1.94 sen).

QoQ. Net property income of RM46.4 showed an increment of 1% (from RM46.0m in 4Q18) (Figure#2) due to full quarter contribution from (i) newly acquired Senawang Industrial Facility (5 December 2018) and (ii) commencement of lease of Upeca Aerotech Sdn Bhd at Axis Aerotech Centre (16 December 2018). Nevertheless, the increment was partially offset by the increase in property expenses due to new assets in the portfolio. Higher total trust expense was due to higher financing costs.

YoY. Gross revenue for 1Q19 increased by 22.0% followed by an increase in core net profit by 21.8%. The lift was mainly driven by new rental contribution from newly acquired properties; (i) Axis Shah Alam DC4 (June 2018), (ii) Beyonics i-Park Campus – Block E, (iii) Indahpura Facility 1 (August 2018) and (iv) Senawang Industrial Facility (December 2018). Also, commencement of lease of (i) Nestle’s lease at Axis Mega DC (June 2018) and (ii) Upeca Aerotech Sdn Bhd’s lease at Axis Aerotech Centre (December 2018). However, the rise was partially offset by the increase in property expenses and financing costs. The increase in property expenses was due to new properties added into the portfolio (added 4 assets). Similarly, Islamic financing cost increased due to additional financing facilities utilised to fund new acquisitions.

Occupancy and gearing. Out of 45 properties, 34 properties enjoyed 100% occupancy. Gearing increased slightly to 38.3% (from 37.3% FY18).

Outlook. We expect a better FY19 with full year revenue contribution from those acquired properties in FY18. Axis REIT’s 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. Although results were in line, we updated our projection based on FY18 audited account, which revised our FY19-20 EPU by -3% and -4%, respectively.

Maintain HOLD, TP: RM1.74. Maintain our HOLD call with higher TP of RM1.74 (from RM1.73) based on FY19 targeted yield of 5.4% (from 5.6%). Following the dovish tilt by major central banks (Fed and ECB) as well as BNM, we revise our assumption of the 10-year MGS yield to 3.9% (from 4.1%; currently at 3.8%). We also roll forward valuation to mid-FY20 and introduced FY21 estimates. To note, our valuation model is based on the targeted yield of 2-year historical average yield spread between dividend yield and 10-year MGS yield

Source: Hong Leong Investment Bank Research - 30 Apr 2019