Axis REIT has proposed to acquire an industrial property for a total sum of RM50m from K-Plastics Industries Sdn. Bhd. Upon completion by end FY19, the properties shall be leased back to K-Plastics Industries Sdn. Bhd. We are positive on the news as the acquisition amount is fair and is yield accretive. We retain forecast pending acquisition completion. Maintain BUY with unchanged TP of RM2.01, based on targeted yield of 4.7%. We like Axis REIT due to its high occupancy diversified portfolio and being one of the few Shariah compliant REITs.

NEWSBREAK

Axis REIT has proposed to acquire a piece of industrial land of approximately 381k sqft from K-Plastics Industries Sdn. Bhd. The land is located within Kawasan Perindustrian Nilai II in Nilai, Negeri Sembilan. The property includes a single-storey factory/warehouse with a double-storey office annexed. The proposed acquisition will cost RM50m, to be funded by existing debt facility. The property has a 100% occupancy rate as at 8 October 2019 and the proposal is expected to be completed by end of 2019. Upon completion, the property with a net lettable area of 247k sqft shall be leased back to K-Plastics Industries Sdn. Bhd. for a fixed period of 10 years from the commencement date upon completion of acquisition (targeted by 4Q19) with an option to renew for another 5 years. The rental rate is at RM277k per month for the first 3 years with a 10% rental step-up in the subsequent every 3 years.

HLIB’s VIEW

Positive. We are positive on the acquisition as it is yield accretive, given the net yield of 7.0% (before Islamic financing cost) vs its current yield of 5.1%. With the new assets, our FY20-21 earnings will improve by 0.3%. The property will have a fixed tenant under a fixed long term lease of 10 years, which further minimises the risk to Axis REIT. We feel the acquisition price works out to be fair for industrial space in Nilai, and it is slightly lower than current market value (RM51m), based on valuations by the independent valuer.

Gearing. Axis REIT intends to utilise debt facility of RM50m from its existing credit facilities. Gearing ratio is expected to increase to 38.4% from 37.3% (FY18).

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

Maintain BUY, TP: RM2.01. We maintain BUY with unchanged target price RM2.01. To note, our valuation 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 - 9 Oct 2019