FY19’s Improved Showing Was Mainly Contributed by New Revenue Contribution From New Assets. Occupancy Rate Remained Flat at 92%, With 36/48 Properties Fully Occupied. Gearing Has Fallen to 29% (-11ppt QoQ) Due to Recent Placement Exercise. Overall, We Expect a Better FY20 With Full Revenue Contribution Kicking in Coupled With New Asset Injections. We Retain Our Forecast and Keep Our BUY Call With Unchanged TP of RM2.03. 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 FY19 results briefing yesterday with positive bias.

FY19 results recap. 4Q19 results came in within expectations with core net profit of RM29.4m (+4.9% QoQ, -18.5% YoY) which brought FY19 sum to RM115.2m (+1.5% YoY). The improvement was mainly contributed by newly acquired assets.

Portfolio. Portfolio size increased by 3 to a total of 48 properties (152 tenants) with 36 properties enjoying 100% occupancy. Average occupancy rate stayed flat at 92% (3Q19: 92%, FY18: 94%). Out of 2.1m sqft of space expiring in 2019, Axis REIT has successfully secured 96% leases with positive rental reversion of 2%.

Capital management. Gearing decreased to 29% (3Q19: 40.0%, FY18: 37.3%) due to recent placement exercise; which the funds raised was 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. Notably, Axis REIT has successfully concluded its 7th placement exercise with the listing of 198m new units on 15th Nov 2019 and 12th Dec 2019.

AEIs. A total of RM9m was spent in FY19 on asset enhancement works: (i) Wisma Academy Parcel with enhancement of washrooms, (ii) Axis Business Park with the installation of new above ground hydrant systems, (iii) Menara Axis with the building of façade improvement work and (iv) Seberang Prai Logistics Warehouse 3 with the enhancement of sewer, electrical and mechanical system.

Pipeline assets. There are 2 more pipeline assets from FY19 that have not been acquired yet (targeting to do so by 1H20): (i) 1 manufacturing facility in Shah Alam, Selangor (c.RM56m) and (ii) 1 manufacturing facility in Kota Kinabalu, Sabah (c. RM60m). Besides, Axis REIT is evaluating other assets to acquire, with an estimated total value of RM135m.

Outlook. We expect a better FY20 with full revenue contribution from acquired properties in FY19 as well as injection of new assets. Due to the surge in e-commerce activity (projected to grow at 11% CAGR according to A.T. Kearney), this has prompted more establishment of distribution centre by retailers and e -commerce players and enhancement of infrastructure development. Management is looking at pursuing quality acquisitions with focus on Grade A logistics and manufacturing facilities.

Forecast. Maintain forecast as the briefing yielded no surprises.

Maintain BUY, TP: RM2.03. We maintain BUY with unchanged TP of RM2.03. 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 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 - 22 Jan 2020