9M16 realised net income (RNI) of RM67.1m met consensus’ expectations at 71% but came in below ours at 66%, as we expected stronger quarters ahead from new asset contributions and stronger reversions and occupancy. 9M16 GDPU of 6.15 sen was also below expectation (66%) while AXREIT announced the disposal of Axis Eureka. We lower FY16-17E to RM93.2-103.2m. Reiterate MARKET PERFORM with a lower TP of RM1.71 (from RM1.80), based on a +1.85ppt yield spread to our 10- year MGS target of 3.60%.

9M16 realised net income (RNI) of RM67.1m came in within consensus (71%) but below our expectations (66%) as top line came in below (at 67% of FY16E) as we expected stronger quarters ahead from new asset contributions (i.e. a full quarter contribution from the warehouse facility in Pasir Gudang which acquisition is yet to be completed), while our occupancy and reversion assumptions may have been slightly over-optimistic. Distribution-wise, an interim dividend of 2.05 sen was declared (which includes a 0.07 sen non-taxable portion). Similarly, 9M16 GDPU of 6.15 sen was below our expectation, making up 66% of our FY16E GDPU of 9.29 sen.

Results Highlights. YoY-Ytd, 9M16 RNI fell by 3.9% due to higher operating costs (+15.1%) and higher financing costs (+6.4%), for acquisition of Beyonics i-Park Block A, B, C and D, on the back of flattish GRI +0.6%. Correspondingly, 9M16 GDPU was lower at 6.15 sen (-3.9%). Meanwhile, QoQ RNI was flattish at (+0.3%) on the back of flattish GRI (+0.5%) and higher financing cost (+1.0%).

Disposal of Axis Eureka. AXREIT announced the disposal of Axis Eureka, a 4-storey office building in Cyberjaya for a total cash consideration of RM56.1m to Malaysian Qualifications Agency. The net gains on disposal of RM1.2m, will be distributed back to shareholders upon completion, likely in FY17, translating to an additional 0.11 sen (1.1% of our FY17E GDPS of 9.8 sen). Axis Eureka has been recording below-average occupancy at 59% while its contributions to earnings is not significant (<2.5% to FY17E GRI). All in, we are neutral to mildly positive on this disposal.(refer overleaf)

Outlook. AXREIT is finalising the completion of the acquisition for two industrial assets, namely (i) a warehouse facility located at Pasir Gudang, Johor (RM33.0m) and, (ii) industrial complex in Rawang, Selangor (RM42.0m), which we have already imputed to accrete mostly in FY17E earnings.

Lowering earnings by 8.9-4.7% to RM93.2-103.2m, post accounting for lower reversions and occupancy, higher operating cost assumptions, as well as disposal of Axis Eureka.(refer overleaf)

Maintain MARKET PERFORM call with lower TP of RM1.71 (from RM1.80). Our TP is based on a lower FY17E GDPU of 9.3 sen on +1.85ppt yield spread to our 10-year MGS target of 3.60%. Maintain MP as we see no convincing near-term catalysts while foreseeable downside risks have been accounted for. Additionally, the group lacks strong DPU accretive catalysts as recent acquisitions and disposals 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 - 25 Oct 2016