1H16 realised net income (RNI) of RM44.6m met consensus’ expectation at 46% and came in broadly within ours at 44%, as we expect stronger quarters ahead from new asset contributions. 1H16 GDPU of 4.10 sen was also broadly within (44%) while earnings forecasts remain unchanged. Reiterate our MARKET PERFORM call with an unchanged TP of RM1.76, based on target gross yield of 5.6%, on a +2.0ppt yield spread to our 10-year MGS target of 3.60%.

1H16 realised net income (RNI) of RM44.6m came in within consensus (46%) and broadly within our expectations (44%) as we expect stronger quarters ahead from new asset contributions. By end FY16E, we expect four full quarters of contribution from Beyonics i-Park Block A,B,C, and D and a full quarter contribution from the warehouse facility in Pasir Gudang. Distribution-wise, an interim dividend of 2.05 sen was declared (which includes a 0.07 sen non-taxable portion). Similarly, 1H16 GDPU was also broadly in-line with our expectation, as it made up 44% of our FY16E GDPU of 9.29 sen (5.2% yield).

Results Highlights. YoY-Ytd, 1H16 RNI fell by 3.2% due to higher operating costs (+12.3%) and higher financing costs (+6.8%), for acquisition of Beyonics i- Park Block A, B, C and D, although GRI improved marginally by 1.0%. Correspondingly, 1H16 GDPU was lower at 4.10 sen (-2.4%). Meanwhile, QoQ RNI was flattish at RM22.4m (+1.1%) due to higher GRI (+1.0%).

Outlook. Pending details in today’s briefing, we believe the group will continue its asset acquisition of up to RM242m of industrial asset, as per management’s initial guidance in 1Q16 results. YTD, AXREIT has completed the acquisition of four industrial properties, namely Beyonics i-Park Campus Block A, B, C and D (RM61.0m) and acquired two industrial assets, which are a warehouse facility located at Pasir Gudang, Johor (RM33.0m) and industrial complex in Rawang, Selangor (RM42.0m), which we have already imputed into our earnings. Note that we make no changes to our earnings forecasts of RM102-108m for FY16-17E.

Maintain MARKET PERFORM call with unchanged TP of RM1.76. Our TP is based on a target gross yield of 5.6%, on a +2.0ppt yield spread to our 10-year MGS target of 3.60%. Our MP call is premised on the fact that we see no convincing near-term catalysts for the stock and we believe any foreseeable downside risks have been accounted for. Meanwhile, the group is lacking strong DPU accretive catalysts as recent acquisitions have been mainly neutral to mildly positive to DPU (<5%). More exciting catalysts for its DPU are needed to re-rate the stock. That said, AXREIT is highly institutionalised and is also one of the very few Shariah-compliant MREITs which we believe will help to offer some downside risk protection.

Downside risks to our call include: (i) bond yield expansion vs. our target 10- year MGS yield, and (ii) weakening rental income.

Source: Kenanga Research - 5 Aug 2016