1Q17 realised net income (RNI) of RM22.8m met both consensus and our expectations at 23% and 22%, respectively. 1Q17 GDPU of 2.15 sen is also within expectation (at 23%). We make no changes to FY17-18E earnings of RM103-108m. Maintain MARKET PERFORM but increase TP to RM1.66 (from RM1.58), on a +1.70ppt yield spread to our 10-year MGS target of 4.20%.

1Q17 realised net income (RNI) of RM22.8m came in within both consensus and our expectations at 23% and 22%, respectively. First interim distribution of 2.15 sen was declared (which includes a 0.11 sen non-taxable portion). This is also within our expectations; making up 23% of our FY17E GDPU of 9.3 sen. Note that 1Q17 dividend distribution includes 0.05 sen gains on disposal from Axis Eureka, while the remaining gains on distribution (0.07 sen) will be distributed in 2nd interim distribution, which we have already accounted for in our FY17E numbers.

Results Highlights. YoY-Ytd, 1Q17 RNI was up by 2.9% driven by positive top-line growth (+3.5%) from; (i) positive rental reversion of 5.8%, and (ii) contribution from Scomi Facility Rawang (acquired in Aug 2016), while higher financing cost (+5.1%) for financing of new acquisition (i.e. Scomi Facility Rawang), weighed down bottom-line growth. QoQ, RNI was down by 1.9% on the back of flattish top-line (0.2%), while higher expenditure (+7.6%), arising from a slightly higher administrative expense, dragged down net profit.

Outlook. AXREIT is finalising the completion of the acquisition of its industrial facility located at Pasir Gudang, Johor (RM33m) which we have previously accounted for in our FY17 estimates. Meanwhile, development at Axis PDI phase 1 already started in Dec 2016 which we expect to accrete positively to earnings in FY18. AXREIT also accepted a Letter of Offer (LO) to acquire an industrial facility in Kuantan, Pahang (on 2 Feb-17) for RM155m, and an industrial facility in Iskandar Puteri, Johor (on 7 Apr 2017) for RM50m. As asset details are still scarce and pending the SPA announcement, we make no changes to our earnings estimates. However, we believe AXREIT will likely require proceeds from a placement to fund these acquisitions as the current gearing of 0.34x is close to its internal gearing limit of 0.35x (refer overleaf). Note that we make no changes to FY17-18E earnings of RM103.2-108.1m.

Maintain MARKET PERFORM but increase TP to RM1.66 post rolling forward our valuations to FY18E GDPU of 9.8 sen (from 9.3 sen) on an unchanged +1.70ppt yield spread to our 10-year MGS target of 4.20%, we increase our TP to RM1.66 (from RM1.58). Our MARKET PERFORM call 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%). However, being highly institutionalized and one of the few Shariah-compliant MREITs, we believe this will help to offer some downside risk protection.

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

Source: Kenanga Research - 26 Apr 2017