Period

2Q15/1H15

Actual vs. Expectations

Realised net income (RNI) of RM46.1m in 1H15 came in below both market and our expectations at 42% and 41%, respectively. The disappointment was due to our optimistic GRI assumptions (45% of our estimates) as the Prai asset acquisition was not completed and Axis Business Campus remains untenanted. Additionally, 1H15 RNI margins were 4.2ppt below our estimate on higher financing cost (55% of our estimates).

Consensus may have missed due to higher financing cost and expenditure as RNI margins were higher at 61% vs. AXREIT’s 55%.

This is the 5th consecutive quarters its results have come in below our estimates, and three times below consensus during the same period.

Dividends

An interim dividend of 4.30 sen was declared (which includes a 0.10 sen non-taxable portion). 1H15’s GDPU of 8.40 sen makes up 42% of our FY15E GDPU of 20.13 sen (~6.0% yield), which is also behind our estimates.

Key Results Highlights

QoQ, topline revenue was up by 1.9% to RM42.4m possibly on positive rental reversions, while lower property opex, increased NPI margins by 0.6ppt to 86.1%. This coupled with lower expenditure (- 11.0%) was sufficient to push RNI up by 4.7% to RM23.6m. The quarter also registered positive FV adjustments of RM8.2m from Axis Business Campus (ABC), Wisma Academy and The Annex.

YoY, topline grew by 17.7% due to positive reversions and higher revenue post completion of acquisitions in 4Q14 for: (i) Axis MRO Hub, (ii) Axis Shah Alam DC 3, and (iii) Axis Steel Centre@SiLC. RNI margins compressed by 5.5ppt to 55% due to: (i) higher expenditure (+35.2%) from administrative expenses, and (ii) higher financing cost (+31.8%) from additional funds required to fund the abovementioned acquisitions, but this did not drag RNI, which increased by 7.0% to RM46.1m.

Outlook

The Prai and Port Klang Industrial Facility acquisition are still in the due diligence phase with expected completion by 4Q15. Additionally, AXREIT is conducting due diligence for an industrial facility in Indahpura, Johor for RM61m; details of which will be obtained at the analysts’ briefing later today.

AXREIT announced a 1:2 share split which is yet to be completed. (refer overleaf)

Change to Forecasts

We make no changes to our FY15-16E RNI of RM110.4m- RM118.6m, while we are estimating gross yields of 6.0%-6.4%.

Rating

UNDER REVIEW

Valuation

Our call and TP are UNDER REVIEW with downside bias pending a briefing with management later today.

Our previous call was MARKET PERFORM and TP of RM3.41 (Ex- Split: RM1.71) on a target gross yield of 5.9%, based on a +2.0ppt yield spread to our 10-year MGS target of 3.9%.

Although recent declines in share price have left AXREIT commanding decent yields of 6.0%-6.4% in FY15-16E vs. other MREITs under our coverage of 5.8%, our call and earnings are leaning towards a downside bias as AXREIT is continuously facing topline and operating margin weakness from lower occupancy due to the office supply glut in Klang Valley (30% of AXREIT NLA), and weakening margins. While AXREIT is one of the more aggressive REITs on the acquisition front, we note that their recent acquisitions have been mainly DPU neutral after accounting for the financing (borrowing costs and dilutions from placements). We require more exciting catalysts for its DPU to re-rate the stock.

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 - 4 Aug 2015