News

AXREIT announced the acquisition of four single-storey detached factories, annexed with two-storey office in Kawasan Perindustrian i-Park, Kulai, Johor for a cash consideration of RM61.0m.

The asset will be acquired from Axis AME IP Sdn Bhd on a 10- year basis and a 13% rental step-up after the first 3-year and 14% rental step-up for the subsequent four years with 100% occupancy (i.e. single tenant occupancy).

Comments

This did not come as a surprise to us as AXREIT had already announced a LO (Letter of Offer) for this asset back in Aug-15 and was undergoing due diligence of the said property.

This i-Park facility’s expected net yield is fair at 7.1% vs. AXREIT’s recently targeted acquisition yields of 7.0%-8.0%, while its annualized FY14 NPI yield was 8.8%. We find the net yield to be fair considering net yields above 7.5% are extremely hard to come by. Additionally, we like the assets strategic location as it is located within Flagship Zone E of Iskandar Malaysia and only 5km from Kulai town, while the entire industrial park is gated and guarded.

The acquisition is expected to be complete by end FY15 and AXREIT will acquire the asset fully via borrowings. As such, the annualized impact is mildly accretive to FY16E DPU (+1.5%) to 10.2 sen, while annualized bottomline impact is also +1.5% to RM111.5m, assuming rental contribution in 1Q16.

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 is yield accretive to shareholders.

The Group is unlikely to revert to a cash call for this acquisition as: (i) the acquisition size is small, and (ii) AXREIT has just completed a placement in 4Q14, providing additional bullets for this acquisition. Post placement and acquisition, we expect FY16E gearing to increase to 0.35x (from 0.33x currently) which is within AXREIT’s internal gearing limit.

Outlook

Awaiting Letter of Offer (LO) for a logistics warehouse located in SiLC, Nusajaya for RM41m.

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

Forecast

We leave FY15E unchanged but increase FY16E by 1.5% to RM111.5m from earnings contribution from the new asset.

Rating

Maintain MARKET PERFORM

Valuation

Maintain MARKET PERFORM but increase TP marginally to RM1.69 (from RM1.67) on higher FY16 DPU from the new asset. 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%.

Although the new asset contributions will help shore up weakness from its multi-tenanted assets (43% of NLA), we see no strong near-term catalysts for the stock.

We are comfortable with our estimates as we believe any foreseeable downside risks have been accounted for.

AXREIT is lacking strong DPU accretive catalysts at this juncture as recent acquisitions have been mainly neutral to mildly positive to DPU. More exciting catalysts for its DPU are needed to re-rate the stock.

Risks to Our Call

(i) Bond yield expansion vs. our target 10-year MGS yield, (ii) weakening rental income, (iii) Office sector’s demand pick up in the Klang Valley.

Source: Kenanga Research - 12 Nov 2015