Better Prospects Ahead

Axis REIT 9MFY17 realised net profit is up by 2% yoy, but is still within both ours and consensus estimates. A 2.0sen DPU was also announced on the back of the results. 9MFY17 performance was mainly driven by rental revision of its existing assets and contribution from assets that were acquired recently. We believe that the prospects for 2018 will be better, as we are anticipating an income stream from Nestlé’s distribution centre (DC), and also rental income from 2 new acquisitions which will be completed by 1HFY18.

FY18 Stronger Growth as New Assets Start Contributing

As the current DPU payout is already close to 100% (9MFY17: 99.7%), the DPU growth will need to be driven by performance of its assets. Apart from Nestlé’s DC, which is expected to contribute RM19m in rental income starting FY18, management is also expected to complete 2 more acquisitions worth RM210m by 1HFY18. Although current occupancy rates are healthy at 90%, there is some upside potential, as management has secured a tenant for its D21 Logistic Warehouse, which was vacant post the expiry of the tenancy agreement in 2QFY17.

9MFY17 Results Within Expectations But Weak Sentiment Risk Remains

Although 9MFY17 realised net profit of RM68.4m is within expectations, we believe that the overhang in the share price could be largely due to the weak consumer sentiment rather than performance of the assets. Given that the weighted average lease expiry (WALE) by rental is at 4.41 years for its 38 assets, management does have some flexibility in managing rental revision negotiations with tenants, as 15% of the total NLA is up for renewal in 2018.

Maintain HOLD and TP of RM1.65

We maintain our HOLD rating on Axis REIT. Our 2018 DDM-derived Price Target is unchanged at RM1.65 (based on a cost of equity of 8%, 6% equity risk premium and 2.0% terminal growth rate). Key downside risk – more sluggish revenue growth rate from the office portfolio. Upside risk – portfolio is secured by strong rental covenants from tenants such as LF Logistics, POS Logistics, Yongnam Engineering and Tenaga.

Source: Affin Hwang Research - 24 Oct 2017