We returned from AXREIT analysts’ briefing feeling neutral on its future prospects. We applaud management’s efforts such as upgrading of its bond facility for future ease of obtaining borrowings, and commend the Group’s decision to focus on industrial asset acquisitions going forward. Additionally, should an asset disposal materialise, investors should look forward to capital gains, which will be distributed to shareholders. That being said, we are recommending UNDERPERFORM on AXREIT as we remain wary of a valuations as we expect FY15 to be a volatile year for the 10-year MGS which may put downward pressure on the unit price. Maintain CALL and TP of RM3.27 based on FY15E target gross yield of 6.7% (+2.5ppt spread to the 10-year MGS target of 4.2%).

Occupancy rates improved to 92.9% in 4Q14 (from 90.5% in 3Q14). AXREIT saw increase in occupancy from: (i) the inclusion of the 3 new fully tenanted properties which are at 100% occupancy (i.e. Axis Shah Alam DC3, Axis MRO Hub and Johor Industrial Facility), (ii) Axis Vista which saw occupancy increasing to 100% (from 85.8%), and (iii) The Annex to 100% (from 44.8%) as there is now a new futsal operator occupying the space for the next 2 years. The slightly higher occupancy came on the back of 2.6% rental reversions which varies significantly from AXREIT’s norm of 8% prior to FY14.

One asset disposal likely in FY15. We believe that management maybe looking to dispose of at least one asset in FY15. Although the asset is yet to be identified, we view this positively as we can expect gains on disposal to be distributed back to shareholders in a similar fashion as with the disposal of Axis Plaza in FY14.

Targeting RM160.0m worth of industrial assets for acquisitions and may look to acquire total assets of RM300.0m-RM400.0m in FY15, which is similar the total amount of assets targeted in FY14. The RM160.0m worth of assets are all industrial-based assets located in Penang, but the Group also has its eye on an industrial play in Johor as they believe there is demand for leasing of industrial spaces there. AXREIT is also upsizing their previous RM300.0m Sukuk programme to an RM3.0b perpetual scheme for ease of borrowing. Should AXREIT choose to acquire all 3 targeted assets of RM160.0m, these can be fully financed via borrowings as their gearing would only to go up to 0.35x (which is AXREITs internal gearing limit).

We make no changes to FY15E-FY16E earnings of RM120m-RM122m at this juncture. At current level, AXREIT is commanding gross yields of 6.2% vs. large cap peers average of 5.9%

Maintain UNDERPERFORM on AXREIT with 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 applaud management’s pro-active efforts in enhancing shareholders’ value and growing the REIT’s portfolio, we are recommending UP due largely to valuations and weakness arising from multi-tenanted asset exposure (41% of NLA). We expect a volatile bond market in FY15, brought about by the weakening MYR and sovereign credit de-rating risk, which may put downward pressure on MREITs’ unit prices. If acquisitions were to heat up in 2H15, we may look to review our CALL/TP on AXREIT and will make that decision in the next quarter pending our observations.

Source: Kenanga