Modest Set of Results, BUY on Weakness

Axis REIT reported a modest set of results – 2017 realised net profit grew by 0.6% on higher revenue, within market and our expectations. 2017 DPU came in 0.1% higher yoy at 8.26 sen, a marginal but notable improvement, ending 3-years of consecutive decline. We upgrade Axis REIT to BUY (from HOLD) with an unchanged price target of RM1.56. We like its asset portfolio (manufacturing facilities and warehouse / logistics assets account for 69% of NLA) and the current valuation of 6.0% 2018E distribution yield looks attractive.

2017 Realised Net Profit Grew by 0.6%, Within Expectations

Axis REIT reported a modest set of results - 2017 realised net profit grew by 0.6% to RM90.9m, tracking a 0.6% increase in revenue, supported by stable NPI margin of 84.2%. The higher 2017 revenue (+0.6% to RM167.8m) was driven by contribution from new assets (Kerry Warehouse, Wasco Facility), positive rental revisions and rental income from 17.6 acres of land at Axis Mega Distribution Centre that more than offset short-term rental losses from two warehouses in Johor and disposal of Axis Eureka. Overall, the results were within market and our expectations.

DPU Is Marginally Higher, But Notable

Axis REIT declared a fourth income distribution of 1.94 sen (4Q16: 2.10 sen), bringing its full year distribution to 8.26 sen (2016: 8.25 sen). The 2017 DPU growth of 0.1% is marginal but notable, as it ends a 3-year consecutive DPU contraction.

Lower Sequential EPU After Completion of Shares Placement

Axis REIT’s 4Q17 realised net profit grew by 2% qoq on lower operating expenses. However, its realized EPU dipped by 2% qoq due to a higher share base, arising from placement of 125m new units (completed on 28th November 2017) and 2.2m new units issued pursuant to Income Distribution Reinvestment Plan.

Upgrade to BUY on Price Weakness, TP Unchanged at RM1.56

We tweaked our FY18-19E EPS by 0-1% after incorporating Axis REIT’s actual FY17 results. No change to our DDM-derived TP of RM1.56. We are however upgrading Axis REIT to BUY on price weakness, expecting a 12- month total shareholder return of 16%. At 6.0% 2018E DPU yield, valuation is above its 6-year historical average of 5.6% and higher than peers, thus looking attractive. Key risk to our positive view are delays / hiccups in commencement of new leases (Nestle Distribution Centre, Upeca Facility @ Subang) and stronger than expected policy rate hikes.

Source: Affin Hwang Research - 24 Jan 2018