Axis REIT (AXREIT) is our 2Q12 Top OUTPERFORM pick as we reiterateour OUTPERFORM with an unchanged TP of RM2.82, based on GGM (8.2% required rateof return, 2.5% terminal growth and FY12E NDPU of 16.1sen). Overall, weare  not worried about the office andindustrial segment as occupancy levels of AXREIT are at 97.2% due to themanagement's capability to secure and retain quality tenants even with the weakeroffice segment. We expect RM300m worth of properties acquisitions in FY12E,thus swelling the portfolio size to RM1.5b (23% increase) by year end assumingpossible finance by placement of 90.8m new units (RM221m new funds) and gearingof slightly less than 0.35x. Assuming all acquisitions are yield accretive, wereckon FY12E GDPU (after dilution) can increase by 5% (+0.3ppt) to 18.8sen(7.0% yield). If so, our TP will increase to RM2.94 from current RM2.82. Goingforward, AXREIT is also looking to realize its asset enhancement initiative viaproperty trading,  without significantlyaffecting income whilst rewarding unitholders with special dividends. Wemaintain our FY12-13E realised net income of RM81.2m-RM85.8m, which impliescorresponding GDPU of 17.9-19.0sen (6.6%-6.3%), which fits our 2Q12 strategy of'flight to safety'.

Not worried about theoffice/industrial segment, albeit weaker office segment dynamics with highincoming supply in the Klang Valley. AXREIT's good reputation providescomparative advantage with the ability of securing and retaining qualitytenants, like Konsortium Logistik Bhd and Tesco Stores (M) Bhd. Industrialportions of the portfolio are not a concern given the longer term leases andtenants in economic resilient businesses (e.g. logistics). We strongly believethe group will be able to maintain portfolio rates at current levels of 97.2%.Also, the weaker  office market provides plentyof bargain acquisition opportunities, particularly when AXREIT is trading atpremium NAV of 1.3x. 

Expect portfolio sizeto grow by 23% to RM1.5b by year end. AXREIT has a ready acquisitionpipeline of RM0.5b over the next two years, including the recently completedacquisitions of Logistic Warehouse @ Bayan Lepas (RM48.5m) and another one inPrai (RM59.0m). Including these two acquisitions, we believe the group canacquire up to a total of RM300m worth of properties in FY12, assuming placementof 90.8m new units (RM221m new funds) and gearing of slightly less than 0.35x.If all acquisitions are yield accretive, we reckon FY12E GDPU (after dilution)can increase by 5% (+0.3ppt) to 18.8sen (7.0% yield). If so, our  TP will increase to RM2.94 from currentRM2.82. 

Increasing NAV willpush valuations higher. BV/share will increase by 3% to RM2.14 postplacement and assuming peak valuations of 1.35x Fwd PBV, this implies a fairvaluation of RM2.89. The recent and potential listing of Pavilion REIT and IGBCorporation retail REIT, respectively, will lend strength to its overall M-REITvaluations, buoying AXREIT share price as it tends to command a more than10%-20% premium to M-REIT valuations. 

Ripe for a propertytrading portfolio. Axis REIT will be looking to realize its assetenhancement initiatives via disposals as some assets are at optimal levels. Thesheer number of properties enables the group to trade properties without havingoverly significant impact on its income. One can expect

special dividends on gains on disposal. We reckon the stockwill continue rerating itself because of its unique value proposition, whichother M-REITs may not be able to offer in the short to medium term. For now, wemaintain our FY12-13E realised net income of RM81.2m-RM85.8m, which implies correspondingGDPU of 17.9-19.0sen (6.6%-6.3%).

Source: Kenanga