Period

3Q15/9M15

Actual vs. Expectations

9M15 realised net income (RNI) of RM69.8m came in slightly below market’s consensus at 68%, but within our expectation at 70%, of full-year forecasts.

Consensus may have missed due to higher financing cost and expenditure as RNI margins were higher at 59% vs. AXREIT’s 55%.

Dividends

An interim dividend of 2.2 sen was declared (which includes a 0.10 sen non-taxable portion). 9M15’s GDPU of 6.4 sen constitutes up to 71% of our FY15E GDPU of 9.0 sen (5.3% yield), hence is within estimate. A gross electable portion of 1.00 sen per unit (taxable) can be reinvested via Income Distribution Reinvestment Plan (IDRP) (refer overleaf).

Key Results Highlights

QoQ, topline revenue was flattish, increasing by only 1.0% to RM42.9m on positive rental reversion. Flattish NPI margins coupled with minimal increase to financing cost (+1.0%), and expenditure (+6.9%) only allowed RNI to increase by 0.6% to RM23.7m.

YoY, topline grew by 20.9% to RM126.9m due to positive reversions and higher revenue post completion of acquisitions in 4Q14 namely: (i) Axis MRO Hub, (ii) Axis Shah Alam DC 3, (iii) Axis Steel Centre@SiLC, and (iv) Axis Shah Alam DC 2 in 1Q15. RNI margins compressed by 4.0ppt to 55% from; (i) higher expenditure (+36.3%) from administrative expenses, and (ii) higher financing cost (+31.7%) from additional funds required to fund the abovementioned acquisitions. As a result, RNI increased by 12.6% to RM69.8m. However, DPU declined by 17.9% to 6.40 sen post adjusting for the share split due to: (i) dilution from placement of 83.6m units in 4Q14, while (ii) FY14 saw higher DPU due to gains on disposal from Axis Plaza.

Outlook

New Letter of Offer (LO) for warehouse in SiLC for RM41m and abortion of Prai LO (refer overleaf).

Dato Stewart LaBrooy will be succeeded by Leong Kit May as the new CEO from Jan-2016. We believe Leong is the best possible candidate as she has been well groomed by Dato Stewart and has been with AXREIT for over nine years.

Change to Forecasts

We make no changes to our FY15E but lower FY16E RNI marginally by 1.6% to RM109.8m upon abortion of the Prai asset’s Letter of Offer (LO).

Rating

Maintain MARKET PERFORM

Valuation

Maintain our call but we lower our TP slightly to RM1.67 (from RM1.70) post abortion of the Prai asset’s LO which we had previously accounted for in FY16E. Our TP is based on a target gross yield of 6.0%, based on a +2.0ppt yield spread to our 10- year MGS target of 4.00%.

AXREIT still warrants a MARKET PERFORM as it commands yields of 5.3%-5.9% in FY15-16E which is on par with the average of MREITs under our coverage at 5.9% in FY16E. We are comfortable with our estimates as we believe any foreseeable downside risks have been accounted for. Nevertheless, AXREIT is lacking a strong DPU accretive catalyst at this juncture. While AXREIT is one of the more aggressive REITs on the acquisition front, we note that their recent acquisitions are 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 - 20 Oct 2015