We attended AXREIT’s 2Q16 result briefing and came away feeling neutral on its future prospect. Occupancy was flattish QoQ on positive rental reversions (+3.82%). We like management’s focus on industrial assets, and expect shares placement should further acquisitions or AEI’s materialise in 2H16. All in, we maintain our MARKET PERFORM call with an unchanged TP of RM1.76, based on a +2.0ppt yield spread to our 10-year MGS target of 3.60%.

1H16 RNI down YoY on the back of higher operating costs from building maintenance and higher financing costs for new asset acquisition. GRI improved marginally by 1.0%, as contribution from newly acquired Beyonics new assets (100% occupancy) offset the loss of rental income from Axis PDI centre (0% occupancy). However, 1H16 RNI was down by 3.2% due to higher operating costs (+12.3%), mainly incurred for building maintenance (i.e. repainting of building) and higher financing costs (+6.8%) for acquisitions of Beyonics i-Park.

Targeting greenfield at Axis PDI Centre. Management reiterated that they seek to transform Axis PDI Centre into a Mega Distribution Centre, increasing its NLA to 1.2m sf in the long run (from 58.0k sf). We gather that that the increase in NLA by building two blocks of asset, while the near term plan is for the development of Block 1 (500k sf; c.RM3psf) which has a pre-committed tenant and is expected to generate GRI of c.RM18m p.a., and may take up to 15 months to be completed. Assuming a cost for Axis PDI is no more than 10% of AUM (c. RM218m), and NPI yield of at least 7% as AXREIT’s recent targeted acquisition yields are between 7.0%-8.0%, (FY15 NPI yield was 6.9%), we expect this acquisition to be accretive from FY18 onwards, contributing c.RM6.1m p.a. from FY18, which we have yet to build into our estimates pending the announcement. (refer overleaf)

Updates on Axis Business Centre (ABC). Meanwhile, we understand that the group has secured a tenant for ABC (occupancy at c.12% of 160k sf; 18.0k sf) with average rental rate of c.RM3.50psf. This asset is expected to come online in 4Q16. Assuming full contribution in FY17E onwards, top line contribution will be RM756.0k (c.0.4% of FY17E GRI), which we deemed as insignificant.

Potential call for placement? Gearing may increase to 0.36x (from 0.34x currently) post the recent acquisitions of two industrial assets (Pasir Gudang warehouse for RM33m and Rawang industrial assets for RM42m). Should SC approve the development of Axis PDI Centre, this could increase gearing progressively up to 0.42x by end-FY17E upon completion of the construction (refer Table 1). As such, any additional acquisitions or major AEI’s during this period could prompt a placement exercise as gearing will be beyond the group’s internal gearing limit of 0.35x. We believe it is likely that a placement may occur in 2H16 as the group is targeting RM188.0m worth of industrial asset acquisitions currently. (refer overleaf). We make no changes to FY16E-17E RNI of RM102-108m.

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 near-term re-rating catalysts while most downsides have been priced in. 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 - 8 Aug 2016