AXREIT proposed a private placement of up to 20% of its existing approved fund size, potentially raising RM465m to pare down borrowings in FY17-18E. We are neutral and not surprised by the placement as this is a normal course of business for AXREIT once gearing is close to its internal limit of 0.35x. Increase FY17-18E by 3-14% on lower financing cost. Maintain MARKET PERFORM but lower TP to RM1.50 (from RM1.66) on lower FY18E GDPS post dilution.

AXREIT has proposed to undertake a private placement of up to 20% of its existing approved fund size (up to 294m units), potentially raising RM465.4m based on the illustrative issue price of RM1.58 (4% discount to the 5-day VWAMP), which will be utilised to pare down borrowings. The proposed placement may be implemented in a single tranche or in multiple tranches while the actual number of units to be issued, and priced, will be determined at a later stage. The placement is expected to be completed in 2Q18.

Neutral and not surprised by the placement as gearing is close to internal limit. We are neutral and not surprised by the placement as this is a normal course of business for AXREIT, as it tends to pare down borrowings via placements once gearing is close to its internal gearing limit of 0.35x (0.34x as at 1Q17). The placement will provide AXREIT with sufficient headroom for future asset acquisitions. Additionally, the increase in the number of units will add to the stock’s trading liquidity.

Increase earnings by 3-14% in FY17-18E, but dilutive to EPU and DPU for now. We are assuming the placement will be split into 2 tranches, one in FY17 and another in FY18. As such, we increase earnings by 3-14% to RM107-123m for now as the placement will lower financing cost in the near term. Additionally, we expect gearing to lower to 0.29-0.20x in FY17-18E for now (from 0.39-0.39x). Lastly, FY17-18E DPU will be diluted in the near term, to 8.5-8.8sen (from 9.3-9.8 sen) pending upcoming asset acquisitions. Assuming AXREIT’s upcoming Letter of Offer (LO) acquisitions in Kuantan (RM155) and Johor (RM50m) can garner 7% NPI yield and assuming similar portfolio returns, we estimate that DPU can increase to 9.1- 9.7sen in FY17-18E, which is mildly dilutive. However, this is yet to be finalised pending asset acquisition details.

Outlook. AXREIT is finalising the completion of the acquisition for its industrial facility located at Pasir Gudang, Johor (RM33m), previously accounted for in our FY17E. Meanwhile, development at Axis PDI phase 1 is expected to accrete positively to earnings in FY18E. AXREIT accepted a 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-17) for RM50m. As asset details are still scarce and pending the SPA announcement, we have yet to build in the LO assets into our earnings.

Maintain MARKET PERFORM but lower TP to RM1.50 (from RM1.66). We lower our TP to RM1.50 (from RM1.66) on a lower FY18E GDPS of 8.8sen (from 9.8sen) post dilution from the placement and on an unchanged +1.70ppt yield spread to our 10- year MGS target of 4.20%. Our MARKET PERFORM call is premised on our neutral outlook for AXREIT due to the lack of convincing nearterm 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 neutralto-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.

Source: Kenanga Research - 24 May 2017