Axis REIT has proposed to lease an industrial property for a total sum of RM3.9m from PCD to build up a single-storey warehouse facility that costs RM11.8m. Upon completion in FY19, the property shall be leased to FedEx for a fixed period of 10 years. We are positive on the news as we opine that the lease amount is fair and yield accretive. We maintain forecast pending completion of the proposal. Following a dovish tilt by major central banks, we cut our 10-year MGS assumption to 3.8% and roll forward our valuation to FY20; we upgrade to BUY with higher TP of RM1.93, based on targeted yield of 4.9%.

NEWSBREAK

Axis REIT has proposed to lease approximately 108k sqft of land in Batu Kawan Industrial Park from Penang Development Corporation (PDC). The lease tenure would be of 30 years and with a total lease consideration of RM3.9m (RM36.00 psf); to be paid in 3 transactions by means of 20%, 30% and 50%.

The company also proposed to develop a single-storey warehouse facility with office space of gross built-up area of approximately 44k sqft inclusive of ancillary buildings and external elements on the said land and will later sub-lease the premises to Federal Express Services (M) Sdn Bhd (FedEx). The proposed development, with a gross built-up area of approximately 44k sqft is estimated to have development costs of RM11.8m, and is expected to be completed by 31 Dec 2019.

Upon completion, the premises shall be sub-leased to FedEx for an initial fixed lease period of 10 years, with an option to renew the lease for a further 5 years. The gross rental income for the 10 years is at an agreed monthly rental of RM132k per month (RM3.00 psf) for the first 7 years, followed by RM145k per month (RM3.30 psf) for the remaining 3 years.

HLIB’s VIEW

Positive. We are positive on the lease arrangement and the sub-lease of the premises as it is yield accretive, given the net yield of 9.0% (before Islamic financing cost) vs its current yield of 5.3%. With the new asset, our FY20-21 earnings will improve by 0.4%. The property will have a fixed tenant under a fixed long term lease of 10 years, which further minimises the risk to Axis. The total lease consideration works out to be RM3.9m which we feel is fair as it is at par with the current market value based on valuations by the independent valuer.

Gearing. Axis intends to utilise debt facility of approximately RM15.7m from its existing credit facilities as well as additional bank financing. Axis’s gearing ratio is expected to increase slightly to 37.6% from 37.3% (FY18).

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

Upgrade to BUY, TP: RM1.93. We upgrade our call to BUY (from Hold) with target price RM1.93 (from RM1.74), simultaneous with our 2H19 sector outlook report; as we cut our 10-year MGS yield assumption to 3.8% (from 3.9%) following a dovish tilt by the major central banks, and roll forward our valuation to FY20. To note, our valuation model is based on 1SD below 2-year historical average yield spread between Axis REIT and 10-year MGS yield in view of increased popularity in industrial properties, high occupant tenancy in its diversified portfolio and also one of the few Shariah compliant REITs.

Source: Hong Leong Investment Bank Research - 16 Jul 2019