Actual vs. Expectations_ 9M14 realised net income (RNI) of RM62.0m was below both market consensus and our expectation, at 65% of full-year estimates. The weaker-thanexpected results were mainly due to lower occupancy rates and softer-than-expected rental reversions while Axis Business Campus is still left untenanted.

Dividends _ An interim dividend of 5.0 sen (-6% QoQ) was declared (includes a 0.84 sen non-taxable portion), based on a 99% payout. So, 9M14 GDPU total is at 15.6 sen (>13% YoY), which makes up 72 % of our FY14E GDPU of 21.6 sen (6.0% yield). However, 9M14 GDPU includes 2.36 sen gains on disposal; stripping this off, 9M14 GDPU is 13.2 sen (-4% YoY).

Key Results Highlights  QoQ, topline revenue declined by 5% to RM33.5m due to lower occupancy rates (90.5% vs. 92.0% in 2Q14) mainly from Axis Eureka, Quattro West, Crystal plaza. Furthermore, (i) EBIT margin declined 3.1ppt to 74.5% on the back of lower GRI and Total Trust income due to lower gains on financial liabilities, (ii) financing cost was up during the quarter (+3%) which dragged down RNI by 9% to RM18.9m. The quarter did register positive FV adjustments of RM20.9m.

YoY, topline and RNI fell by 2% and 2% to RM105.0m and RM62.0m, respectively. There was one less asset in the portfolio (Axis Plaza) as of 1Q14. Rental reversion was flattish (+1.9%) while occupancy rate was lower at 90.5% (vs. 94.7% in 3Q13). Despite fewer assets, operating cost increased by 6% to RM16.3m due to higher maintenance cost from repainting works on most properties. However, the decrease in financing cost (-6%) due to refinancing efforts and repayment of loans post-disposal of Axis Plaza was sufficient to offset the increase in expenditure (9%).

Outlook _ AXREIT has already signed the SPA for 4 out of 5 acquisitions scheduled in FY14. 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 end-FY14 (83.6m no. of 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.

Change to Forecasts_ We have lowered our earnings forecasts by 7.0%-1.6% to RM89.0-RM120.0m accounting for the weaker occupancy rates on multi-tenanted assets. Note that our estimates take into account the 5 asset acquisitions and placement of 83.6m units.

Rating Downgrade to UP (from MP)

Valuation   Downgrade Call to UP (from MP) and TP to RM3.48 (from RM3.53) based on a target gross yield of 6.3% (2.5ppt spread to the 10-yr MGS target of 3.80%). (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