We returned from AXREIT analysts’ briefing unexcited on its prospects. While the asset acquisition pipeline appears strong, we believe it will be tough to find compelling yield accretive assets while certain existing but weak performing assets may be a drag. Occupancy was flattish QoQ on positive rental reversions (+7.95%), with Axis PDI Centre becoming vacant in 4Q15. In turn, management is seeking to transform Axis PDI Centre to a Mega Distribution Centre with higher NLA at 1.2m sf (from 58.0k sf). Meanwhile, we applaud management’s move for targeting RM369.0m worth of industrial assets and have two accepted LOs, namely warehouse facility in SiLC, Nusajaya (RM41.0m) and Pasir Gudang, Johor (RM33.0m), as industrial assets provide relatively stable stream of rental income due to longer lease term nature. In view of loss of income from Axis PDI Centre and lower occupancy rates from Axis Eureka, we lower FY16E earnings by 8.2%. Maintain MARKET PERFORM but lowered TP to RM1.55 (from RM1.69) post earnings adjustment, with an unchanged target gross yield of 6.0% based on a +2.0ppt yield spread to our 10-year MGS target of 4.0%.

4Q15 GRI down QoQ as Axis PDI Centre became vacant. AXREIT’s FY15 RNI came in below market’s and our expectation, at 92% due to lower-thanexpected gross rental income (GRI) in 4Q15 which was primarily due to Axis PDI Centre which saw sole tenant (Konsortium Logistik Berhad) moving out, leaving occupancy at 0% (from 100% in 3Q15). Meanwhile, the reduction in 4Q15 GRI was partially offset by Menara Axis’s higher occupancy rates of 93.7% in 4Q15 (from 78.8% in 3Q15), as management managed to obtain two existing tenants (DHL and TNB) to take up 2.5 floors (c.28k sf). Additionally, EBIT margins compressed to 70.8% in 4Q15 (from 74.8% in 3Q15) due to net loss on financial liabilities of RM1.6m, which comes from downward revaluation of current tenant deposits.

The impact will lower our FY16 GRI by 5.1%. New plans for Axis PDI Centre. Management has highlighted that they seek to transform Axis PDI Centre into a Mega Distribution Centre, increasing its NLA to 1.2m sf (from 58.0k sf). This will be done via way of collaboration with its promoter, which will get the Development Order (DO) as well as approval from the relevant authorities to develop additional NLA. However, management is looking for a tenant to pre-commit to this new space before initiating development, suggesting that the whole process could take up to mid-FY17 before the asset starts contributing to GRI.

FY16 targeting RM369.0m of industrial asset acquisitions. Management has highlighted that it will be focusing on RM369.0m worth of industrial asset acquisitions targeted in 1H16 (refer overleaf). At current gearing levels of 0.34x, AXREIT could borrow up to RM650.0m before hitting 0.50x gearing ceiling (refer Table 1 in overleaf). Note that AXREIT’s placement mandate, which expires on 27-Jul-16, will be used to pare down gearing back to internal gearing limits of 0.35x. Additionally, management is still working on pursuing an asset disposal as it did not materialise in FY15 due to tough market conditions. Should this materialise, it would be a bonus for investors as gains on disposal would be given back to investors in the form of dividends. We have not factored for any asset disposals or any of the target acquisitions in our estimates.

We lower FY16E RNI by 8.2% to RM102.3m and introduce FY17E RNI (refer overleaf). We are estimating gross yields for FY16E-17E at 5.9%-6.1% (net yield: 5.3%-5.5%) vs. peers’ averages of 5.9%-6.4%.

Maintain MARKET PERFORM but lower TP to RM1.55 (from RM1.69). Post earnings adjustment, we tweaked our TP downwards to RM1.55, with an unchanged target gross yield of 6.0% based on a +2.0ppt yield spread to our 10- year MGS target of 4.0%. Our MP call is premised on the fact that we see no convincing near-term catalysts for the stock, while the group is lacking strong DPU accretive catalysts at this juncture as recent acquisitions have been mainly neutral to mildly positive to DPU while there are non-performing existing assets dragging on the effects of the acquisitions. More exciting catalysts for its DPU are needed to re-rate the stock. That said, as AXREIT is highly institutionalised and is one of the very few Shariah compliant MREITs which we believe will help to offer some downside risk protection to the stock. 

Source: Kenanga Research - 20 Jan 2016