As anticipated, Axis REIT has proposed to undertake a placement of up to 247m new units, representing c.20% of its existing share base. The placement will raise RM433.1m to be utilised for repayment of borrowings (RM428.3m) and placement related expenses (RM4.8m). We leave our forecast unchanged for now, pending completion of the placement exercise and take up. We note that the expected dilution will be partially offset by interest savings, decreasing its FY20-21 EPU and DPU by only c.5%. Maintain BUY with unchanged TP of RM2.03, based on FY20f DPU on targeted yield of 4.7%.

NEWSBREAK

Axis REIT announced that it will be undertaking a placement of up to 247m new units, representing c.20% of its existing share base. Based on its assumed indicative issue price of RM1.75 (4% discount to the 5-day weighted average market price up to and including 30 September 2019 closing price of RM1.82), the placement will raise RM433.1m. This will be utilised for repayment of borrowings (RM428.3m) and placement related expenses (RM4.8m).

The placement will be placed out to third party investors to be identified later. Axis REIT has submitted the placement application to Bursa yesterday and expected to complete the exercise by the end of FY19.

HLIB’s VIEW

Not a surprise. This placement is anticipated as its gearing has reached its internal policy of gearing cap of 40%.

Largely to pare down debt. The placement will enable Axis REIT to raise funds to repay its bank financing and provide Axis REIT with sufficient headroom to make future cash acquisitions of new property, in line with its capital management and growth strategy.

Impact to net gearing. Based on our estimation, the placement is expected to reduce Axis REIT’s net gearing from 40% (3Q19) to 24% on a proforma basis.

Positive. We are positive towards the placement exercise as this will reduce Axis REIT net gearing significantly while not being overly dilutive to the unitholders (estimated at about 5%). Besides, this will also allow Axis REIT to acquire more assets to enlarge its portfolio size which in turn allows management to enjoy greater operating efficiency arising from economies of scale.

Forecast. We leave our forecast unchanged for now pending completion of the placement exercise. As an indication, assuming the placement is fully subscribed and completed by the end of this year, its full year impact to FY20-21 EPU and DPU would be about 5% net dilution, as unit base will increase from 1,237m units to 1,484m units, but partially offset by interest savings (RM18.7m per annum). Accordingly, our post placement TP is estimated to be at RM1.93 (-5.2% from our current TP).

Maintain BUY, TP: RM2.03. We maintain BUY with unchanged target price of RM2.03 as we leave our forecast unchanged pending completion of this corporate exercise. To note, our valuation is based on FY20f DPU on targeted yield of 4.7% which is derived from 1SD below 2-year historical average yield spread between Axis REIT and 10-year MGS yield. We like Axis 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 - 30 Oct 2019