We reiterate our BUY recommendation on Axis REIT with a higher DDM-derived TP of RM2.04 (from RM1.90) after incorporating earnings contributions from Axis Mega DC2 from 2021E given management’s target to secure new tenant(s) by end-2019 and the robust demand for warehouse/logistic assets, as well as a lower discount rate. At a 5.4% 2019E yield, Axis REIT’s valuation looks attractive, in view of its sector-leading 2019E EPU growth rate of 7.6%, solid assets occupancy, as well as the compression in MGS yield (MREITs valuation is positive correlated to 10-year MGS prices).

Management targets to secure tenant(s) for Axis Mega DC 2 by end- 2019; we estimate the project may lift 2021E EPU by 4%

Axis REIT is keen to develop Axis Mega Distribution Centre Phase 2 (Fig 2) on the site located next to DC1. Based on the property info memo, Axis REIT plans to develop the site into a grade-A distribution centre with green mark qualification and a flexible modular space configuration. We are positive on the proposed development. Based on several assumptions (Page 2), we forecast the project to lift Axis REIT’s 2021E EPU by 4%.

A Beneficiary From Any OPR Cut

Axis REIT has the highest earnings sensitivity to OPR changes, vs the other five MREITs under our coverage. Approximately 69% of its borrowings is based on floating rates, notably higher than peers’ 0%-35%. We estimate that a 25bps cut in the OPR will lift its full year EPU by 1.5%. While we maintain our house view that BNM will maintain the OPR at 3.2% throughout 2019, we see a higher risk for a cut versus a hike.

We Trim Our 2019-20E EPU But Lift Our 2021E EPU by 3%

We trimmed our 2019-20E EPU by 1.1-1.3% but lifted our 2021E EPU by 2.7% after incorporating: (i) the 2018A financial and operational details; (ii) flat office rentals for 2019-20E (from earlier forecasts of 2-3% growth); (iii) a lower average finance cost of 4.45% (from 4.50%); and (iv) earnings contributions from Axis Mega DC 2 starting 2021E.

Maintain BUY With a Higher TP of RM2.04 (from RM1.90)

We raised our DDM-derived TP to RM2.04 (from RM1.90) after incorporating the earnings forecast revisions and a lower discount rate of 7.9% (from 8.2%). At a 5.4% 2019E yield, Axis REIT’s valuation looks attractive, in view of its sector-leading 2019E EPU growth rate of 7.6%, solid assets occupancy, as well as the compression in MGS yield.

Source: Affin Hwang Research - 10 Apr 2019