Period  2Q14/1H14

Actual vs. Expectations 1H14’s realised net income (RNI) of RM43.1m was within market consensus but below our expectations, at 46% and 41% of full-year estimates, respectively. The weaker-than-expected results were due to higher-than-expected financing and operating cost assumptions.

Dividends  An interim dividend of 5.30 sen was declared, which includes a 0.90 sen non-taxable portion, based on a 99% payout. This is on track to meeting our FY14E GDPU of 21.6 sen (6.3% yield).

Key Results Highlights QoQ, topline revenue declined marginally by 2% to RM35.4m possibly due to lower occupancy rates, as operating cost also declined by 8%. Total Trust income was also lower (-35%) due to the absence of gains on disposal seen in 1Q14, dragging down RNI, which declined by 7% to RM20.8m. Stripping off this gain, RNI was flat at 0.4%.

 YoY, topline was flat, but operating cost increased (8%) to RM11.2m, which dragged down net rental income by 1% to RM60.2m. However, lower financing cost (-8%) due to refinancing efforts and repayment of loans post-disposal of Axis Plaza, managed to increase RNI (including gains on disposal) by 3% to RM43.1m. This was sufficient to counter the rise in operating cost (+8%) and expenditure (+9%). Excluding the gains on disposal, RNI declined by -1%.

Outlook  AXREIT has proposed acquisition of 3 assets worth RM280.5m from its sponsors. This is on track to meeting management’s target of acquiring RM380-400m worth of assets this year. We were taken by surprise by the announcement as we had expected acquisitions to be slower in light of the current low cap rate environments. Net gearing will increase from 0.32x to 0.42x post acquisitions and we can expect the group to complete its placements of 83.6m new units once the acquisitions are completed. We are more neutral on these acquisitions as there is no major DPU changes post the dilution from placement.

Change to Forecasts We lower our FY14E RNI by 9% as we increase our financing and operating cost assumptions. However, we increase our FY15E RNI by 18% as we factored in the new asset contributions. We estimate FY14-15E GDPU of 21.6 sen-21.2 sen (6.3%-6.2% yield) after our earnings adjustments. (Please refer overleaf for details.)

Rating Upgrade to MP from UP

Valuation  We have upgraded our CALL and TP to RM3.37 from RM3.08 based on a lower FY15E target gross yield spread of 2.5% (1.3ppt spread to the 10-year MGS target of 3.80%) from the previous 3.2% spread assumption. We have narrowed our gross yield spread assumption to lower-than-normalized levels as we expect investors to hold on to AXREIT shares in view of the placement. (refer overleaf)

Risks to Our Call  (i) Bond yield expansion vs. our target 10-year MGS yield (ii) weakening rental income (iii) Office sector demand pick up in the Klang Valley.

Source: Kenanga