We returned from AXREIT analysts’ briefing feeling neutral on its future prospect. Occupancy was flattish QoQ on positive rental reversions (+7.83%). However, the office segment remains sluggish due to a supply glut. We applaud management’s effort to target the industrial asset segment, eyeing RM270.0m industrial assets and issuing issued three LO’s for industrial assets, in Prai, Port Klang and Indraputra, Johor. Additionally, should an asset disposal materialise, investors should look forward to capital gains, which will be distributed back to shareholders. We lower FY15E-FY16E earnings by 10.3%-5.9% to RM99.1m-RM111.6m on lower occupancy of multi-tenanted office assets, and the absence of GRI contribution from ABC and Prai asset in FY15. Maintain MARKET PERFORM and increase TP slightly to RM3.45 (from RM3.41) after rolling forward to FY16E GDPS of 20.4 sen based on target gross yield of 5.9% (+2.0ppt spread to the 10-year MGS target of 3.9%).

Occupancy was flattish at 92.67% (from 92.58% in 1Q15), but office segment remains sluggish. There were no major changes QoQ besides an improvement from: (i) Infinite Centre at 84.9% (from 71.4% in 1Q15) which is due to a new tenant moving in post refurbishment works, and (ii) Wisma Academy at 93.0% (from 91.8% in 1Q15). However, assets that continued to see below average occupancy rates include: (i) Fonterra’s HQ’s (85.0%), (ii) (ABP) (59.3%) (iii) Menara Axis occupancy (78.7%), (iv) Axis Eureka (59.1%), (v) Axis Tech Centre (78.1%), (vi) Crystal Plaza (81.3%), and (vii) Quattro West (84.2%), while ABC remains untenanted.

Promising rental reversions of 7.83%. Flattish occupancy came on the back of positive rental reversions of 7.83% on 55.0% (495,089sf) of the NLA up for renewal in FY15. Most assets recorded high reversions from 7.5%-15.4%. The only exceptions were: (i) Crystal Plaza (zero reversions) and Seberang Prai Logistics Warehouse 3 (zero reversions) on pre-negotiated lease renewal. Besides, Axis Eureka also saw a mere 0.22% reversion.

Targeting RM270.0m worth of industrial assets acquisition. The Group is targeting RM270.0m of industrial assets for acquisitions in FY15 (refer overleaf), and has also issued three LO’s (Letter of Offer) to date, for: (i) an industrial facility in Indahpura, Johor for RM61.0m, (ii) Prai Industrial Facility, and (iii) Port Klang Industrial Facility, all of which are still at the due diligence phase which may be completed by 4Q15 or FY16 Asset disposal in FY15 highly likely. Management had previously highlighted, and we concurred, their views to dispose of at least one asset in FY15 to allow for positive DPU growth in FY15. At this rate, FY15 annualised DPU would be 16.8 sen vs. 19.5 sen in FY14 (15% YoY decline in DPU), suggesting that management would likely dispose an asset to ensure DPU growth. We reckon that management may opt to dispose a non-performing, multi-tenanted asset (i.e. Axis Eureka, Quattro West, Crystal Plaza or Infinite Centre). Although the asset is not identified, we view this positively as we can expect gains on disposal to be distributed back to shareholders in a similar fashion as it was in FY14 with the disposal of Axis Plaza.

We lower FY15E-FY16E earnings by 10.3%-5.9% to RM99.1m-RM111.6m. 1H15 RNI came in below our expectations mainly due our overly optimistic GRI assumptions (45% of our estimates) as the Prai asset acquisition was not completed and Axis Business Campus remains untenanted. As a result, we have trimmed our topline to account for: (i) prolonged occupancy weakness from Menara Axis, Axis Eureka and Axis Tech Centre, (ii) removal of ABC from our FY15E earnings due to difficulty in securing tenant, and (iii) removal of Prai asset from FY15E as the LO stage has been prolonged. At current levels, AXREIT is commanding gross yields of 5.9% vs. large cap peers average of 5.8%.

Maintain MARKET PERFORM and increase TP slightly to RM3.45 (from RM3.41) as we roll forward our valuations to FY16E GDPS of 20.4 sen (from FY15). We have assumed an unchanged target gross yield of 5.9% based on a +2.0ppt yield spread to our 10-year MGS target of 3.9%. Our MP call is premised on the fact that we see no convincing near term catalysts for the stock, while DPU trends are unexciting as the new assets are not significantly accretive to AXREIT DPU post the placement. However, the stock is highly institutionalised and is one of the very few Syariah MREITs, which will help offer some downside risk protection.

We came away from AXREIT briefing feeling neutral on the REIT’s future prospect. The 2Q15 results’ briefing held at Westin Hotel yesterday was presented by Datuk Stewart LaBrooy (CEO and executive director of Axis-REIT Managers Bhd) and Leong Kit May (Chief Operating Officer, and Group CFO), Chan Tze Wee and Chan Wai Leo, (Business Development and Investor Relations). Occupancy was flattish QoQ at 92.67% (from 92.58% in 1Q15), but office segment remains sluggish. There were no major changes QoQ besides an improvement from: (i) Infinite Centre at 84.9% (from 71.4% in 1Q15) which is due to a new tenant moving in post refurbishment works, and (ii) Wisma Academy at 93.0% (from 91.8% in 1Q15).

Assets that have continued to see below average occupancy rates include: (i) Fonterra’s HQ’s at 85.0% is due to the vacant space which the tenant aims to utilise for future expansion, (ii) Axis Business Park (ABP) continued to experience low occupancy of 59.3% after Fuji Xerox relocated in 1Q14, leaving 3 floors untenanted, (iii) Menara Axis occupancy at 78.7% since 1Q15 (from 100% in 4Q14) , (iv) ) Axis Eureka at 59.1% since 1Q15 (from 62% in 4Q14), (v) Axis Tech Centre at 78.1% (from 88.3% in 1Q15), (vi) Crystal Plaza at 81.3%, and (vii) Quattro West at 84.2%. Additionally, Axis Business Campus (ABC) remains untenanted due to the nature of the property that targets high specification tenants with unique requirements.

Promising rental reversions of 7.83%. Flattish occupancy came on the back of positive rental reversions of 7.83% on 55.0% (495,089sf) of the NLA up for renewal in FY15. This is an improvement from 6.1% in 1Q15 and 0.65%-2.6% in FY14. Most assets recorded high reversions from 7.5%-15.4%. The only exceptions were: (i) Crystal Plaza (zero reversions), to retain the F&B space, and Seberang Prai Logistics Warehouse 3 (zero reversions) on pre-negotiated lease renewal, and Axis Eureka with 0.22% reversions.

1H15 RNI up 7.0% to RM41.6m, mainly on asset acquisitions. YoY-Ytd, 1H15 saw RNI growing by a solid 7.0% to RM41.6m mainly from the four new assets acquired in 4Q14 and 1Q15 (i.e. Axis MRO Hub, Axis Shah Alam DC 3, Axis Steel Centre@SiLC, and Axis Shah Alam DC 2). However, 1H15 DPU declined to 8.4 sen (from 10.6 sen in 1H14) due to: (i) dilution from 20% placement which was completed in 4Q14, and (ii) gains on disposal for Axis Plaza which was distributed in 3 tranches, 2 of which were in 1H14.

Asset disposal in FY15 highly likely. Management has previously highlighted, and we concur, their views to dispose of at least one asset in FY15 to allow for positive DPU growth in FY15. At this rate, FY15 annualised DPU would be 16.8 sen vs. 19.5 sen in FY14 (15% YoY decline in DPU), suggesting that management would likely dispose an asset to ensure DPU growth. We reckon that management may opt to dispose a non-performing, multi-tenanted asset (i.e. Axis Eureka, Quattro West, Crystal Plaza or Infinite Centre). Although the asset is not identified, we view this positively as we can expect gains on disposal to be distributed back to shareholders in a similar fashion as it was in FY14 with the disposal of Axis Plaza.

CAPEX of RM15.0m-20.0m in FY15 on minor AEI’s. As for FY15, management has spent RM7.6m YTD, and expects to spend RM15.0-RM20.0m for now on minor AIE’s on various assets within the portfolio. The Group also has future plans to refurbish The Annex to upgrade the entire appearance of the building, preferable in CY2016. AEI Updates: 1. Axis Business Park Block C- includes enhancement to the building façade, common toilets, lift, lobbies, loading bay, M & E system and traffic routing re-design to convert the building to a multi-tenant building. 2. Axis Business Campus (formerly known as Wisma Bintang) - to upgrade the appearance of the South and West Wing Targeting RM270.0m worth of industrial assets acquisition. The Group is targeting RM270.0m of industrial assets for acquisitions in FY15, located in Penang, Negeri Sembilan, Johor and Port Klang. These assets include: (i) an industrial facility in Bayan Lepas, (ii) an industrial facility in Seberang Perai, (iii) an industrial facility in Negeri Sembilan, (iv) a warehouse in SiLC, Johor, (v) a warehouse in Pasir Gudang, Johor, (vi) a warehouse and manufacturing facility in West Port, Port Klang, and (vii) an industrial facility in Sri Kembangan, Johor. The Group has also issued three LO’s (Letter of Offer) to date, which include for an industrial facility in Indahpura, Johor for RM61.0m and is conducting the due diligence on the asset. The Prai and Port Klang Industrial Facility acquisition are still in the due diligence phase with expected completion by 4Q15 or FY16 As the group had highlighted before, they are moving towards acquiring single-tenanted, industrial properties and away from multitenanted/ office assets. This is due to the weak demand which has resulted in fluctuating occupancy in most of their multi-tenanted assets (82.4% average occupancy for multi-tenanted assets vs. portfolio average of 92.7%). Currently, multi-tenanted assets comprise 41.7% of AXREIT’s portfolio NLA, which the Group is working on reducing going forward.

We lower FY15E-FY16E earnings by 10.3%-5.9% to RM99.1m-RM111.6m. 1H15 RNI came in below our expectations at 41% mainly due our overly optimistic GRI assumptions (45% of our estimates) as the Prai asset acquisition was not completed and Axis Business Campus remains untenanted. As a result, we have trimmed our topline to account for: (i) prolonged occupancy weakness from Menara Axis, Axis Eureka and Axis Tech Centre, (ii) removal of ABC from our FY15E earnings due to difficulty in securing tenant, and (iii) removal of Prai asset from FY15E as the LO stage is taking longer than expected. At current levels, AXREIT is commanding gross yield of 5.9% vs. large cap peers average of 5.8%.

Source: Kenanga Research - 5 Aug 2015