Period

1Q15/3M15

Actual vs. Expectations

1Q15 realised net income (RNI) of RM22.5m came in within market expectations at 20.5%, but was below ours at 18.7% of full-year FY15E. The disappointment to our estimate was mainly due our optimistic GRI assumptions (21% of our estimates) as we had factored in full-year contributions for the Prai asset (still pending completion) while we also assumed that Axis Business Campus would be fully tenanted for the year. Furthermore, 1Q15’s lower RNI margins (8.3ppt below ours) were significantly weaker-than-expected due to higher-than-expected expenditure (admin expense), and managers fees.

Dividends

An interim dividend of 4.10 sen was declared (which includes a 0.09 sen non-taxable portion). 1Q15’s GDPU makes up 18.7 % of our FY15E GDPU of 21.9 sen (6.1% yield).

Key Results Highlights

QoQ, topline revenue was up by 18.7% to RM41.6m mainly from higher revenue from newly completed acquisitions in 4Q14 for: (i) Axis MRO Hub, (ii) Axis Shah Alam DC 3, and (iii) Axis Steel Centre@SiLC, and on positive portfolio rental reversions of 6.1%. The higher expenditure (+36%) and higher financing cost (+4.9%) compressed margins by 1.0ppt to 54.0%, resulting in RNI increasing by only 16.4% to RM22.5m. The quarter also registered positive FV adjustments of RM0.51m from Emerson Industrial Facility Nilai.

YoY, topline grew by 15.5% due to similar reasons mentioned above. However, (i) higher expenditure (+40%) from administrative expenses which were likely from GST related cost, and managers fees, and, (ii) higher financing cost (+29%) as additional funds were required to fund the abovementioned acquisitions. As a result, RNI margins thinned by 7.8ppt to 54.0%, resulting in minimal RNI growth of 0.9% to RM22.5m.

Outlook

AXREIT has completed the acquisition of three assets, namely; (i) Axis Shah Alam DC3, (ii) Axis MRO Hub, and (iii) Axis Shah Alam DC2, and has already signed the SPA for the Industrial facility in Johor. However, the Prai asset is the only remaining asset yet to be acquired, and the due diligence is expected to be completed in 2Q15.

AXREIT also announced a 1:2 share split on 3rd March 2015, which is pending approval from SC, and to be followed by approval from unitholders. We will adjust our per unit data once the exercise is completed.

Change to Forecasts

We lower our FY15-16E RNI by 8.1%-2.6% to RM110.4m- RM118.6m, while we are estimating gross yields of 5.6%-6.0%.

Rating

Maintain MARKET PERFORM

Valuation

Maintain MARKET PERFORM but lower TP slightly to of RM3.41 (from RM3.42) on a lower target gross yield of 5.9% (6.4% previously) based on a lowered yield spread of +2.0ppt (+2.5ppt previously) to our 10-year MGS target of 3.90%. (refer overleaf)

While we like management’s pro-active efforts in enhancing shareholder value, we are recommending MP. Although the new asset contributions will help shore up weakness from its multitenanted assets (43% of NLA), we see no near-term catalysts for the stock. Meanwhile, DPU trends are unexciting as the new assets were not significantly accretive to their DPU post the placement. Although our TP implies less than a 3% total return, the stock is highly institutionalised and is one of the very few Syariah MREITs, which will help offer some downside risk protection.

Risks to Our Call

(i) Bond yield compression, (ii) Better-than-expected rental reversions, (iii) Better-than-expected occupancy rates in the office segment.

Source: Kenanga Research - 21 Apr 2015