Axis REIT has proposed to acquire an industrial property for a total sum of RM11.87m from Melewar Steel Services Sdn. Bhd. The completion of acquisition is subject to procuring a suitable tenant to accept the offer to rent the property that includes rental rate of a minimum RM70k per month and a minimum fixed term of 3 years. 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 RM2.47. 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 8.7k square metres from Melewar Steel Services Sdn. Bhd. The land is located within Seksyen 15, Shah Alam. The property includes a single-storey detached warehouse building and other ancillary buildings.

The proposed acquisition will cost RM11.87m, to be funded by existing debt facility and is expected to be completed by 1Q21. The completion of acquisition is subject to procuring a suitable tenant to accept the offer to rent the property. The offer to rent the property includes rental rate of a minimum RM70k per month and a minimum fixed term of 3 years commencing on or before the completion of the acquisition without any early termination.

HLIB’s VIEW

Positive. We are positive on the acquisition as it is yield accretive, given that the net property income (NPI) yield is close to 7% (assuming the minimum rental of RM70k per month) vs its current yield of 6%. With the new asset, Axis REIT’s annual earnings will improve by approximately 0.5%. We feel the acquisition price works out to be fair for an industrial space in Shah Alam, Selangor and about 7.3% lower than its market value (RM12.8m) based on the valuation by independent valuer. The net book value of the property was RM12.5m as at June 30, 2019.

Gearing. Axis REIT intends to utilise debt facility from its existing credit facilities. Gearing ratio is expected to increase to 28.98% from 28.7% (FY19), which is below the gearing limit of 60% prescribed by the Securities Commission Malaysia.

Established location. We believe procuring a tenant in this area would not be hard as the property sits on prime industrial land in Seksyen 15, Shah Alam. Due to its proximity to Port Klang and good all-round accessibility coupled with good infrastructure in place, Seksyen 15 has become an attractive industrial locality in this part of Selangor for medium and heavy industries. Management also shared that they have already receive some request/enquiries to rent the property.

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

Maintain BUY, TP: RM2.47. We maintain BUY with unchanged target price RM2.47. 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 - 4 Sept 2020