Axis REIT has proposed to acquire 2 industrial properties in Nusajaya, Johor for RM55.8m. We are mildly positive on the acquisitions - the leases have long tenures and the tenants are established MNCs with international operations. We estimate the net yields at 7.0-7.5%, comparable to Axis REIT’s recent acquisitions, look fair. Nonetheless, uplift to our 2020E earnings would be minor at 1.1-1.3%, on our estimates. Reaffirm BUY call and TP of RM2.04.

Acquiring Two Industrial Properties in Nusajaya for RM55.8m

Axis REIT has entered into sale and purchase agreements with Nusajaya Tech Park Sdn. Bhd. to acquire two industrial properties (together with freehold land) for a total cash consideration of RM55.8m. The two properties are located in Taman Teknologi Nusajaya, Johor.

(i) The first property (RM42m) comprises of 3 detached factories, with a combined land area of 1.47ha. The factories are currently leased to GKN Engine Systems Component Repair, an aerospace-related manufacturer and services company, for repair and maintenance of transport equipment. The lease has a fixed period of 6 years, with an option to renew for 6 years. The initial rental of RM3.14m per annum translates to a gross yield of 7.5% for the first 3 years; and

(ii) The second property (RM13.8m) has c.0.66ha of land area. The property (one factory) is currently leased to Sternmaid Asia Pacific, a company involved in the manufacturing and product development of ingredients and additives for food and nutritional supplements. The lease has a fixed period of 5 years, with an option to renew for another 5 years. The annual rental is fixed at RM1.11m throughout the tenure (gross yield of 8.0%).

We Are Mildly Positive on the Proposed Acquisitions

We are mildly positive on the proposed acquisitions as: (i) the tenants are established MNCs with international business operations: (ii) the leases have a long tenure of 5 to 6 years: and (iii) we estimate these properties to deliver net yields of between 7.0%-7.5%, comparable to the 6.8%-7.7% net yield achieved for Axis REIT’s recent acquisitions (2017-19). Assuming an interest rate of 4.5%, we would expect these acquisitions to be earnings accretive, but the uplift to Axis REIT’s 2020E EPUs would be minor at 1.1- 1.3%, on our estimates.

Axis REIT Has Acquisitions / Development Targets Worth RM258m

Axis REIT has identified RM258m worth of acquisition and development targets, including these two properties in Nusajaya and the two Penang properties announced in July 2019 (cumulatively, these four properties have a combined price tag of RM92.1m). These RM258m worth of acquisitions / developments, if fully materialized, may increase Axis REIT’s gearing ratio to 44% (from 38% currently). In view of Axis REIT’s large acquisition pipeline, we will not rule out a possible placement of new shares. We are neutral on a placement exercise, as long as the proceeds are used to fund yield accretive and strategic acquisitions.

Assuming: (i) Axis REIT is to acquire all the RM258 assets shortlisted; (ii) Axis REIT is to undertake a 10% share placement at 5% discount to current price to fund the acquisition; (iii) the assets to deliver an average net yields of 7.2%; and (iv) 4.5% borrowing costs for the new borrowings, we would expect the exercise to lift Axis REIT’s 2020E DPU by 3%.

Reaffirm BUY Call and DDM-derived TP of RM2.04

We maintain our earnings forecasts for now, pending the completion of the acquisitions. We reiterate our BUY rating and DDM-derived 12-month target price of RM2.04. We continue to like Axis REIT for its industrial / warehouse asset portfolio, sector-leading EPU growth in 2019E, attractive 5.3% yields for 2019E and strong acquisition pipeline. Key downside risks: lower-than-expected asset occupancy rates, further weakening of the office market, delay in securing tenant(s) for Axis Mega Distribution Centre 2, and an unexpected increase in the OPR / 10-year MGS yield.

Source: Affin Hwang Research - 14 Aug 2019