We attended AXREIT?s FY16 results briefing yesterday and came away feeling neutral on its future prospects. Occupancy is stable at 92% and reversions were unexciting at 3.0%. AXREIT will see 1.3m sf (17.8% of the portfolio leases) up for expiry in FY17. Maintain FY17E NP of RM103.2m and introduce FY18E numbers. Maintain MARKET PERFORM and TP of RM1.58, on a +1.70ppt yield spread to our 10-year MGS target of 4.20%.

Flattish occupancy at 92.03%. QoQ, occupancy improved slightly to 92.03% (from 91.44% in 3Q16) mainly from improved occupancy at Axis Business Campus, which increased to 12% (previously untenanted). Management previously guided for this in 2Q16, which has been imputed in our estimates but full contribution in FY17E onwards suggests RM756.0k p.a. to GRI (c.0.4% of FY17E GRI), which we deemed as insignificant. Additionally, Wisma Academy also saw slight occupancy improvement (+2%) while most of the portfolio remained unchanged (refer overleaf).

Unexciting but positive rental reversion of 3.00%. AXREIT saw positive rental reversion of 3.00%, which was unexciting compared to FY15 reversions of 7.95%, but this is on the back of a tough property market. Going forward, we expect portfolio reversions to stay positive, likely within low-to-mid single-digit. The 3.00% reversion was on 1,675,609 sf of NLA or 22% of the total portfolio NLA while the positive reversion was mainly due to Emerson (refer to Table in overleaf ).

Minimal leases for expiry in FY17-18E. We expect minimal leases up for expiry going forward with FY17-18 seeing 1.3-1.1m sf (17.8- 14.6% of the portfolio leases) up for expiry which we have accounted for. As for FY17, 21.4% of the leases up for expiry have already been renewed to date. Additionally, besides Axis PDI development, we do not expect any major capex in FY17-18. As such, we are targeting RM10-12m for maintenance capex for the portfolio in FY17-18E, close to FY16 levels of RM11m.

Outlook. AXREIT is finalising the completion of the acquisition for its industrial facility located at Pasir Gudang, Johor (RM33.0m) and is likely to complete the disposal of Axis Eureka by 1Q17. Meanwhile, development at Axis PDI phase 1 has begun in Dec 2016 which we expect to accrete positively to earnings in FY18. AXREIT?s gearing currently is close to the group?s internal gearing limit of 0.35x, which would prompt the group to resort to a placement, likely in 2H17 upon completion of disposal of Axis Eureka and acquisition of Pasir Gudang Industrial Facility.

Maintain FY17E CNP and introduce FY18E CNP of RM108.1m. We maintain FY17E earnings of RM103.2m, and introduce FY18E CNP of RM108.1m. Our FY17-18E GDPU are 9.3-9.8 sen which translates to 5.7-5.9% yield.

Maintain MARKET PERFORM and TP of RM1.58. Our TP is based on FY17E GDPU of 9.3 sen on +1.70ppt yield spread to our 10-year MGS target of 4.20%. Our MARKET PERFORM is premised on our neutral outlook for AXREIT due to the lack of convincing near-term catalysts while most downsides have been accounted for. Additionally, AXREIT lacks strong DPU accretive catalysts in the near term as recent acquisitions and disposals have mostly been neutral-to-mildly positive to DPU (<5%). Risks to our call include: (i) bond yield expansion vs. our target 10-year MGS yield, and (ii) weakening rental income.

Source: Kenanga Research - 20 Jan 2017