News

AXREIT announced the Letter of Offer (LO) for an acquisition and leaseback of an Industrial Facility in Port Klang for a cash consideration of RM46.0m.

The asset will be acquired from Haisan Resources Berhad (PN17) and leased back based on a fixed term of 15 + 15 years and an 8% rental step-up for the first three years and 10% rental step up for the subsequent three years with 100% occupancy (i.e. single tenant occupancy).

Comments

The LO came as a surprise as we expected the acquisition of the Prai asset (RM38.0m) before further acquisitions. AXREIT has yet to sign the SPA for the Prai asset, with an estimated timeline for completion by 4Q15.

The Port Klang Industrial Facility’s expected net yield is attractive at 8.8% p.a. vs. AXREITs recent few acquisitions, which commanded net yields of 7.0%-8.0%, while AXREIT annualized FY14 NPI yield was 8.8%. The Port Klang asset yield is attractive in our view as asset yields above 8.0% are tough to come by.

AXREIT will acquire the asset fully via borrowings. Should it materialise, its annualized impact is mildly accretive to FY16E DPU (+2.4%) while annualized bottomline impact is less than 3%.

We are neutral to positive on this acquisition. Although the quantum of contribution is relatively small to its bottomline, we like that the target acquisition yield is on par with its portfolio, which makes it an accretive acquisition.

If this acquisition is completed by the end of this year, we can expect FY16E gearing to increase from 0.37x to 0.38x*. The group’s preference is to maintain a gearing of 0.35x and may opt to do cash calls if there is a sufficient pipeline of assets to match the dilution impact. At this juncture, there is a fairly active acquisition pipeline as the manager is assessing seven properties in Penang, Johor and Negeri Sembilan worth RM270.0m. Should sufficient amount of these acquisitions materialise, management may consider doing a cash call.

Outlook

We expect AXREIT to complete the due diligence for the remaining asset (Industrial Facility in Prai) by year end.

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

Forecast

We leave our earnings unchanged at this juncture pending the due diligence which may take longer than expected (end 4Q15 to FY16), while impact to FY16E earnings is minimal by +2.4%.

Should the acquisition materialise, FY16E earnings would increase marginally by 2.4% to RM121m.

Rating

Maintain MARKET PERFORM

Valuation

Maintain MARKET PERFORM and TP of RM3.41 (RM1.71 post share split) based on a target gross yield of 5.90% (2.0ppt spread to the 10-year MGS target of 3.90%).

Although the new asset contributions will help shore up earnings against weakness from its multi-tenanted assets (43% of NLA), we see no strong near-term catalysts for the stock. Meanwhile, DPU trends are unexciting as the new assets were not significantly accretive to their DPU. 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 expansion vs. our target 10-year MGS yield (ii) weakening rental income (iii) Office sector demand pick up in the Klang Valley

Source: Kenanga Research - 23 Jun 2015