Actual vs. Expectations FY14 realised net income (RNI) of RM81.3m was below expectations, making up 89% of consensus, and 92% of our, full-year estimates. The disappointment to our estimates was mainly due to lower RNI margins (2.8% below ours) on the back of higher-than-expected expenditure (admin expense and managers fees) and finance cost. Consensus disappointed as AXREIT’s topline only came in at 94% while RNI margins were 3.4% below consensus.

Dividends  An interim dividend of 1.45 sen was declared (which includes a 0.17 sen non-taxable portion). The Group also announced a 2.70 sen dividend (in Nov-14) as a pre-placement income distribution (total 4.5 sen for 4Q14). This brings FY14 GDPU total to 19.8 sen (>7% YoY), which makes up 98 % of our FY14E GDPU of 20.2 sen (5.7% yield). However, FY14 GDPU includes 2.36 sen gain on disposal; stripping this off, FY14 GDPU is 17.4 sen (-6% YoY).

Key Results Highlights QoQ, topline revenue was up by 5% to RM35.1m on possibly better occupancy rates from Axis Eureka, Quattro West and Crystal Plaza which are all awaiting new tenants to maximise occupancy. Furthermore, EBIT margins have improved by 4.9ppt to 79.4% from higher profit income on the back of a higher topline. However, higher financing costs (+19%) weighed down on earnings which only increased by 2% to RM19.3m. The quarter also registered positive FV adjustments of RM5.1m.

 YoY, topline fell by 3% to RM140.0m as there was one less asset in the portfolio (Axis Plaza) as of 1Q14 or possibly due to declining YoY occupancy since 9M14 recorded only 90.5% occupancy vs. FY13 of 94.8%. (FY14 occupancy number pending today’s briefing). RNI dipped lower by 4% because of: (i) higher operating cost (+4%) also due to higher other property operating expenditure, (ii) higher administrative expenses, and (iii) higher managers’ fees.

Outlook  AXREIT has signed the SPA for 4 out of 5 acquisitions and is expected to complete the due diligence for the remaining asset (Prai Industrial Facility) by 1Q15.

 AXREIT has already completed the acquisition of Axis Shah Alam DC3 and Axis MRO Hub, while the acquisition of Axis Shah Alam DC2 is expected to be completed by 1Q15.

Change to Forecasts We make no changes to our FY15E earnings pending the analysts’ briefing today. Our FY15E includes the share placement (83.6m units) and acquisition of all 5 assets, including the Prai Industrial Facility. We are estimating gross yields for FY15-16E at 6.2%-6.3%.

Rating Maintain UNDERPERFORM

Valuation  Maintain UP and TP of RM3.27 based on a target gross yield of 6.7% (2.5ppt spread to the 10-year MGS target of 4.20%). While we like management’s pro-active efforts in enhancing shareholder value, we are recommending UP due largely to valuations. We believe that bond yields will be more volatile this year, no thanks to the weakening MYR and sovereign credit derating risk which may put downward pressure on MREITs’ unit prices. We believe the stock lacks positive re-rating catalysts while earnings risk is also unfolding given that AXREIT portfolio still has sizeable multi-tenanted asset exposure (38% of NLA) which is susceptible to dips in occupancy.

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

Source: Kenanga