News  AXREIT announced the acquisition and leaseback of an industrial facility in SiLC, Nusajaya Johor for a cash consideration of RM153.5m.

 The asset is a steel fabrication facility acquired from Yongnam Engineering Sdn Bhd which will be leased back based on a fixed term of 15 years + 15 years and a 10% rental step-up every 3 years with 100% occupancy (i.e. single tenant occupancy)

Comments  This acquisition is largely expected. On 5-Aug, concurrent with the acquisition of 3 earlier assets, AXREIT highlighted they had signed the Letter of Offers (LO) for 2 additional assets, including the said property. The other asset which has an LO but not signed SPA is an industrial facility in Prai (for RM38.0m). Expected completion is end 2014.

 This industrial facility in Johor is expected to provide a net yield of 7.2% p.a. vs. AXREIT’s annualized 1H14 NPI 7.8% yield. Although it is below its portfolio’s yield, we believe it is quite decent for prevailing standard as there is a mismatch between asset price and rent.

 We are neutral on this acquisition as we had already accounted for any earnings increments in our estimates. Also, it is not surprising to see that the acquisitions will just sufficiently match dilutions from placements given that the first 3 assets have NPI yield of 7.0% while the said asset yields 7.2% vs. their annualized 1H14 portfolio yield of 7.8% (refer to our AXREIT Company Update: Focussing on Industrial Assets dated 6th August 2014).

Outlook  The string of acquisitions by AXREIT is well on track with their target of acquiring RM380-RM480m worth of assets in FY14. To date, management has acquired RM434m worth of assets.

 We expect AXREIT to complete the due diligence for the remaining asset (industrial facility in Prai) by year end, followed by a share placement targeted by 1Q15 (83.6m units) to pare down borrowings. It will reduce the Group’s net gearing to 0.35x (from 0.43x post acquisitions of the 5 assets and pre-placement).

Forecast  No changes to earnings. We have imputed for 5 asset acquisitions, of which 4 are at signed SPA stage (with the remaining one still pending) which will commence contributions in Jan-15. The placement (83.6m units) has also been built into our estimates.

Rating Maintain MARKET PERFORM

Valuation  Maintain MARKET PERFORM and TP of RM3.53 based on a target gross yield of 6.3% (2.5ppt spread to the 10-year MGS target of 3.80%).

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

Source: Kenanga