Axis REIT reported a modest set of results – 1H18 realised net profit grew by 4% to RM48m on contributions from new assets and commencement of new leases; realised EPU however fell by 7% due to placement of new units in 4Q17. Broadly, the results are within market and our expectations. Maintain HOLD with an unchanged price target of RM1.58. While we like Axis REIT’s manufacturing and logistics assets, the prolonged weakness in the office market and risk of OPR hike may cap the upside potential. At 5.7% 2018E/6.3% 2019E yield, valuation is within historical trading range, looks fair.

1H18 Realised Net Profit Grew by 4% Yoy, Within Expectations

Axis REIT reported a modest set of results – 1H18 realised net profit grew by 3.8% to RM48.1m on the back of higher revenue (+10% yoy), driven by rental from newly acquired assets (Kerry Warehouse, Wasco Facility) and lease commencements of Damco Logsitic (1st Feb 2018) and Nestle DC (1st Jun 2018). Axis REIT’s 1H18 realised EPU however slipped by 6.9% yoy due to an increase in the share count (+11.5%), leading to a lower DPU of 3.94 sen (-8.8% yoy). Overall, the results are within market and our expectations. Axis REIT’s 1H18 realised net profit accounted for 45% of street and our full year earnings forecasts. We expect rental contribution from Nestle DC (commenced on 1st June 2018) to lift 2H18 earnings.

Sequentially, Realised Net Profit Grew by 3% on Rental From Nestle DC

Sequentially, Axis REIT’s 2Q18 realised net profit grew by 3.1% to RM24.4m, attributable to full-quarter rental from Damco Logistic (vs 2 months in 1Q18) and 1 month of rental contribution from the Nestle DC. In tandem with the higher realised EPU, management has declared a higher 2Q18 DPU of 2 sen (from 1.94 sen in 1Q18).

Maintain HOLD With a DDM-derived TP of RM1.58

We maintain our earnings forecasts, HOLD rating and DDM-derived price target of RM1.58. While we continue to like Axis REIT’s manufacturing and logistics assets, the prolonged weakness in the office market and risk of an OPR hike may cap its upside potential. At 5.7% 2018E/6.3% 2019E yield, valuation is within historical trading range and looks fair. Key upside risk: stronger-than-expected earnings. Key downside risk: hiccups in the development of new project (Upeca Facility @ Subang).

Source: Affin Hwang Research - 7 Aug 2018