News  Axis REIT announced the proposed disposal of Axis Plaza, for a total cash consideration of RM34.0m which is at a slight premium to the appraised value of Axis Plaza of RM32m. Net disposal gain is RM11m vs. the investment cost of RM22.5m and estimated disposal expense of RM0.5m.

 The purpose of the disposal is to realise the value of the asset under AXREIT’s value enhancement efforts as it has fully matured. Axis Plaza had previously recorded below average occupancy rates of c.89%.

Comments  We were not surprised with this announcement as the management had guided that it will dispose some of its assets, particularly when the asset has reached full maturity. We had also anticipated that AXREIT may dispose of Axis Plaza or Wisma Kemajuan due to their below average occupancy rates. The intention to trade assets is well within the company’s strategy of managing a property trading portfolio.

 Unitholders can look forward to the net gains on disposal of RM11.0m or 2.35 sen/share, which will be fully distributed back to shareholders.

 The remaining proceeds from the disposal of RM23m will be used to pare down borrowings to allow for new gearing headroom for new AEIs and potential new acquisitions. We expect FY14E gearing to reduce marginally from 0.36x to 0.35x post the exercise.

Outlook  There could be a possibility of other disposals as AXREIT has a total of RM225m revaluation gains across all its assets, and we believe asset acquisitions in FY14 may be tough due to the low cap rate environment.

Forecast  We have increased FY14 RNI and DPU up by +11% each to RM104.8m and 22.8sen, to take into account the exercise (refer overleaf).

Rating Upgrade to OUTPERFORM from MP

Valuation  We have increased our spread by +1.0ppt to +3.15ppt to the 10-year MGS to account for (i) bond yield reversals, which typically results in yield spread expansions, (ii) loss of one asset income generator which accounts for 2% of its RNI on an annualized basis. As a result, our TP has been lowered slightly to RM3.13 (from RM3.28), despite the higher DPU from the disposal. Nonetheless, the gain on disposal does increase its FY14E GDPU significantly and offers investors a decent FY14E gross yield of 7.8%. We believe investors will chase for the gains on disposal. Our TP still provides a decent 14.5% total return after taking into account a greater risk premium. However, post the payout to shareholders and in the absence of significant acquisitions, we may review our CALL/TP again.

Risks to Our Call Office sector supply glut in the Klang Valley.

 Rising bond yield environment.

OTHER POINTS

Increased FY14 RNI and DPU up by 10.6% each to RM104.8m and 22.8sen after taking into account the net positive impact of the following; (i) FY14 RNI and DPU up by 0.6% due to lower finance cost from borrowings being pared down by RM23m from the sale of AXPLAZA, (ii) FY14 RNI and DPU is lowered by 1.5% given the loss of AXPLAZA income for 6 months in FY14, assuming disposal completed on 30 June 2014, and (iii) FY14 RNI and DPU is up by 11% on net disposal gains from sale of AXPLAZA of RM11m.

We have lowered our TP to RM3.13 (from RM3.28) due to increased spreads and bond yield reversals. We have increased our spread for AXREIT this time around by +1.0ppt to +3.15ppt for a few reasons: (i) Bond yield reversals and QE tapering have caused MREITs’ spreads to be on the uptrend again. AXREIT's spread to the 10-year MGS used to be 4.3ppt when the 10-year MGS was at 4.0% compared to a low of 2.0ppt in CY13. Prior to the selldown, AXREIT's yield spreads had been on par with other retail MREITs on the prospects of potential injection of more Johor industrial assets. However, we think the possibilities have faded given the sharp rises in asset valuations down south which have caused severe yield compressions, (ii) The increase in AXREIT's spread is also to reflect office and industrial MREITs inclination to command higher spreads compared to retail REITs as retail REITs have stronger growth prospects due to their shorter term leases and more competitive business nature, and (iii) Loss of one asset income generator which accounts for 2% of its RNI on an annualized basis while the prospects of replacement via new asset acquisition remains slim.

As a result, we lower out TP slightly from RM3.28 to RM3.13 on a (i) higher spread of +3.15ppt to our 10-year MGS target of 4.15%, after imputing a higher GDPS of 22.8 sen (net: 20.6 sen) from the disposal of Axis Plaza. Nonetheless, we upgrade our call to OUTPERFORM from MARKET PERFORM as the gain on disposal increase its FY14E GDPU significantly which offers investors a decent FY14E gross yield of 7.8%. We believe investors will chase for the gains on disposal. Our TP stills provides a decent 14.5% total return after taking into account a greater risk premium. However, post the payout to shareholders and in the absence of significant acquisitions, we may review our CALL/TP again.

Source: Kenanga