AXREIT has announced the acquisition of a warehouse facility in Pasir Gudang, Johor for RM33.0m. We are not surprised and are neutral to positive on this acquisition, which is DPU neutral in FY16E, but accretive from FY17E onwards. As such, we maintained FY16E earnings and upgrade FY17E by 1.6%. Reiterate MARKET PERFORM call with upgrade in TP to RM1.67 (from RM1.60) based on higher earnings and as we roll forward valuation to FY17E.

Another industrial asset in Johor. AXREIT announced the acquisition of a single-storey warehouse facility in Pasir Gudang, Johor, for a cash consideration of RM33.0m from Orientant Int. Sdn. Bhd. The asset consists of 163,000sf NLA with 100% occupancy (i.e. single tenant occupancy to Kerry Ingredients (M) Sdn Bhd) and will be tenanted until Jan 2019, with an option for an additional two years renewal.

Strategic location with fair net yield of 7.5%. We are not surprised as AXREIT had already announced a LO (Letter of Offer) for this asset back in Dec 2015 and was undergoing due diligence of the said property. The warehouse facility expected net yield is fair at 7.5% vs. AXREIT’s recent targeted acquisition yields of 7.0%-8.0%, while its FY15 NPI yield was 6.9%. We find the net yield to be fair since net yields above 7.5% are hard to come by. Location-wise, we like the asset strategic location within Flagship Zone D of Iskandar Malaysia and only 23km to east of Johor Bahru City centre.

DPU neutral to FY16E, but accretive in FY17. The acquisition is expected to be completed by 3Q16 and AXREIT will acquire the asset fully via borrowings. As such, the annualized impact is neutral to FY16E DPU due to minimal revenue contribution (3 months) and mostly accretive to FY17E DPU (+1.6% to 9.7 sen) while annualized FY16E-17E bottomline impact is negligible and +1.6% to RM102.3m-RM106.8m, respectively, assuming rental contribution from 4Q16. Post-acquisition, we expect AXREIT’s gearing to remain relatively unchanged at 0.35x (from 0.35x currently) as the acquisition size is small. However, the group may revert to cash call for future acquisitions if gearing breaches its internal gearing limit of 0.35x. Recall that AXREIT’s last placement was completed in 4Q14 and it has an existing placement mandate which was recently renewed on 29-Apr-16.

We are neutral to positive on this acquisition. Although the quantum of contribution is relatively small, we like that the target acquisition which is yield accretive to shareholders in FY17E.

Slight adjustment in FY17E earnings by 1.6%, while keeping FY16E unchanged. We maintain FY16E earnings at RM102.3m and increased FY17E by 1.6% to RM106.8m, on earnings contribution from the new asset.

Maintain MARKET PERFORM but increase TP to RM1.67 (from RM1.60) as we roll forward to FY17E to capture earnings accretion from this acquisition. Meanwhile, we look to roll forward remaining MREITs coverage in upcoming 3Q16 strategy. Our TP is based on a target gross yield of 5.8%, based on a +2.0ppt yield spread to our 10-year MGS target of 3.80%. We are comfortable with our estimates as we believe any foreseeable downside risks have been accounted for, while AXREIT is lacking strong DPU accretive catalysts 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. Downside risks to our call include: (i) bond yield expansion vs. our target 10-year MGS yield, and (ii) weakening rental income.

Source: Kenanaga Research - 24 May 2016