We attended AXREIT’s FY13 results briefing yesterday and came away feeling more upbeat on its prospects. We are positive on its capital management strategy of increasing its fixed rate borrowings exposure in FY13 which we believe will help mitigate financial risk from interest rate fluctuations. Management also guided that they are confident on an asset acquisition this year, which is rare as most MREITs under our coverage, including AXREIT, did not acquire any assets in FY13. The group is eyeing RM380m worth of assets acquisition with yields of 7%-8% and we expect a possible acquisition by 1Q14. We make no changes to our FY14 and FY15 estimates as we have already imputed the disposal of Axis Plaza in mid-FY14. Maintain OUTPERFORM and TP of RM3.11 based on a FY14E gross yield of 7.3% (net: 6.6%).

FY13 results within consensus but slightly below ours. To recap, FY13 realised net income (RNI) of RM84.3m was within consensus but marginally below our expectations due to higher-than-expected trust expenses. QoQ, 4Q13 RNI was almost flattish while FY13 RNI grew 6% YoY due to full year rental income recognition from Emerson, Wisma Academy Parcel and The Annex which were completed in 3Q12 and 4Q12, respectively. FY13 GDPU dropped by 1% to 18.5 sen, but this is mainly due to the one-off gains on disposal of Kayangan Depot in 4Q12. Stripping out the gains on disposal of 1.3 sen, FY13 GDPU increased by 6.9% YoY. The group achieved positive rental reversion rates of 8.08% on 14.5% of NLA. Occupancy rate was slightly lower YoY at 94.9% from last year’s 96.2% but an improvement from last quarter’s 94.7%. Going forward, FY14 will witness major lease expiry for the group as 34% of its NLA is up for renewals compared to last year’s 17.2%.

Better capital management in FY13 from higher fixed rate borrowings and lower financing rates. The group has actively embarked to improve their capital management by increasing its exposure to fixed-term borrowings and pegging it to lower interest rates. Its fixed:floating rate mix has improved to 60:40 from 38:62 in FY12 via the issuance of the 2nd tranche of the Sukuk which carries a low interest rate of 4.1%. We believe this will stand management in good stead to weather any interest rate hikes in FY14. Meanwhile, their long-term:short-term debt profile has also improved to 50%:50% (FY12: 38%:62%). This is inline with other MREITs’ strategy of striving to improve borrowings mix towards more fixed rates and long-term debt profiles. However, AXREIT’s fixed rate and long-term components are still lower compared to IGBREIT, CMMT and SUNREIT

Eyeing RM380m worth of acquisitions in FY14. Management is confident of new acquisitions in FY14, despite the absence of acquisitions in 2013. The group is still eyeing an estimated RM380m worth of industrial assets located in Penang, Shah Alam, Port Klang and Johor. We are positive on the group’s strategy to focus on industrial assets as it may prove more resilient in a rising cost environment, as leases tend to be for longer tenures with lower step up rates compared to office or retail REITs. We are also positive on the potential assets for acquisition by the group as these assets could derive 7%-8% projected net yields which we favour as high yielding assets have been difficult to come by of late due to the low cap rate environment. We also believe the group may consider further disposals during the year for its matured assets.

Maintain OUTPERFORM and TP to RM3.11. We make no changes to our FY14 and FY15 estimates as we have already imputed the disposal of Axis Plaza in mid-FY14. Our TP is based on FY14E target gross yield of 7.3% (net:6.6%) which carries a +3.15ppt spread to the 10-year MGS of 4.15%. We believe the stock is attractive at current levels as it provides 14.9% total returns while investors can look forward to gains on disposal of Axis Plaza. However, post the payout to shareholders and in the absence of significant acquisitions, we may review our CALL/TP again.

Source: Kenanga