Axis REIT reported a strong set of results – FY18 realised EPU grew 13% yoy to 9.2 sen on contribution from new leases, acquisition of new assets and improved office occupancies. In tandem, management has declared a higher FY18 DPU of 8.74 sen (+6% yoy). The results are above market and our expectations. We upgrade Axis REIT to BUY (from HOLD) with a higher DDM-derived price target of RM1.90 (from RM1.58) after incorporating higher FY19-20E earnings forecasts and a lower discount rate of 8.2% (from 8.8%). At 6.0% 2019E yield, Axis REIT’s valuation looks attractive.

FY18 Realised EPU Grew by 13% Yoy, Above Expectations

Axis REIT reported a strong set of results – FY18 realised net profit grew by 25% yoy to RM113.4m on the back of higher revenue (+21.4% yoy), driven by maiden rental / full year contributions from six newly acquired assets, lease commencements of Damco Logsitic (1st Feb 2018) and Nestle DC (1st Jun 2018), as well as improving occupancy at its office buildings. Axis REIT’s FY18 realised EPU grew by a lower 13% yoy due to an increase in its share base (+11.5%). Overall, the results are above market and our expectations – Axis REIT’s FY18 realised net profit beat consensus and our forecast by 8% and 7% respectively on higher revenue and firmer profit margins.

Sequentially, Realised Profit Grew by 23%, DPU at Highest Since 3Q14

Sequentially, Axis REIT’s 4Q18 realised net profit grew by 23% to RM36m, driven by maiden / full quarterly rental contributions from newly acquired assets (ie. Beyonics i-Park Campus Block E, Senawang Industrial Facility) and commencement of Axis Aerotech Centre @ Subang in December 2018. Boosted by RM35.2m fair value gain, the REIT’s 4Q18 headline net profit grew by 125% qoq to RM67m. Elsewhere, Axis REIT’s 4Q18 DPU of 2.45 sen DPU (+26% yoy) is its highest quarterly payout since 3Q14.

Upgrade to BUY With a Higher DDM-derived TP of RM1.90

We raise our FY19-20E earnings forecast by 7-8% after incorporating the earnings contributions from new assets, higher profit margin and higher office occupancy rates. Elsewhere, we have lowered our equity risk premium to 8.2% (from 8.8%) in view of: (i) Axis REIT’s improving earnings visibility after the completion of constructions at Nestle DC and Axis Aerotech Centre; (ii) our expectations for a stable OPR; and (iii) higher investor appetite for Shariah compliant MREITs. At 6.0% 2019E, Axis REIT’s valuation is below historical average (Fig 5), looks fair. Key downside risk: weaker than expected earnings due to lower occupancy rate / higher doubtful debts.

Source: Affin Hwang Research - 23 Jan 2019