1H19’s improved showing was mainly contributed by new revenue contribution from new assets, which we expect to follow through in 2H19. Occupancy rate improved to 95%, with 34 properties fully occupied. However, gearing increased to 38.4% and is expected to rise further with 7 acquisition targets by year end (estimated value of RM250m; Axis REIT plans to fund them via debts with potential for share placements). Overall, we expect a better 2H with full revenue contribution kicking in and new asset injections. We maintain our forecast and keep our BUY call with unchanged TP of RM1.93. We continue to like Axis REIT for its high occupancy diversified portfolio and being one of the few Shariah compliant REITs on Bursa.

We Left Axis REIT’s 1H19 Results Briefing Yesterday With Slight Positive Bias.

1H19 results recap. 2Q19 results came in within expectations with core net profit of RM28.9m (+0.3% QoQ, +18.2% YoY), which brings 1H19 sum to RM57.8m (+20%). The improvement was mainly contributed by newly acquired assets; Axis Shah Alam DC4 (Jun 2018), Beyonics i-Park Campus (Aug 2018), Indahpura Facility 1 (Aug 2018) and Senawang Industrial Facility (Dec 2018), and the commencement of lease at Axis Mega DC (Jun 2018) and Aerotech at Axis Aerotech Centre (Dec 2018).

Portfolio. Axis REIT has 45 properties (154 tenants) with 34 properties enjoying 100% occupancy. Average occupancy rate increased slightly to 95% (1Q19: 94%, 1H18: 94%). Out of 2.1m sqft of space expiring in 2019, Axis REIT has successfully secured 47.4% leases. Notably, Nestle is Axis REIT’s top tenant since 1H18.

Capital management. Gearing increased slightly to 38.4% (1Q19: 38.3%, 1H18: 36.5%) and is expected to rise further after the completion of acquisition for industrial properties at Bayan Lepas and Batu Kawan coupled with more future acquisitions. To fund future acquisitions in the pipeline, we believe Axis REIT may raise funds via bank borrowings with potential placements in 2019.

AEIs. A total of RM4.1m was spent on asset enhancement works of the properties in the portfolio (i) Wisma Academy Parcel with enhancement of washrooms and (ii) Axis Business Park with the installation of new above ground hydrant systems.

Outlook. We expect a better 2H19 with full revenue contribution from acquired properties in FY18 and the expected completion of acquisitions in Bayan Lepas and Batu Kawan as well as injection of new assets.

Pipeline assets. Grade A logistics and manufacturing facilities with single tenancy and long leases continue to be the prime focus. Axis REIT is aggressively targeting to acquire 7 new assets by year end of FY19; (i) 2 manufacturing facilities in Nusajaya, Johor (c. RM56m), (ii) 2 manufacturing facilities in Shah Alam, Selangor (c. RM56m), (iii) 1 manufacturing facility in Kota Kinabalu, Sabah (c. RM66m), (iv) 1 manufacturing facility in Nilai, Negeri Sembilan (c. RM50m) and (v) 1 property in Bayan Lepas (ongoing acquisition). Total estimated value of acquisition targets is about RM250m.

Forecast. Maintain.

Maintain BUY, TP: RM1.93. We maintain our BUY rating, with unchanged TP of RM1.93. Our TP is based on targeted yield of 4.9% which is derived from 1SD below its 2-year historical average yield spread between Axis REIT and 10-year MGS (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 - 26 Jul 2019