1H17 realised net income (RNI) of RM46.3m was slightly below our (44%) but within consensus (47%) expectations. 1H17 GDPU of 4.32 sen was within expectations (50%). AXREIT announced the acquisition of an industrial asset in Kuantan for RM155m, which we are neutral for the near term. Maintain FY17-18E of RM107-123m pending a briefing today. Maintain MP and TP of RM1.55 on FY18E GDPS and +1.70ppt to our 10-year MGS target of 4.00%.

1H17 RNI of RM46.3m came in slightly below our but within consensus expectations at 44% and 47%, respectively. We believe our estimates fell slightly short due to the delay in acquisition of the industrial asset in Pasir Gudang, Johor (RM33m) which was completed yesterday, but which we already fully accounted in FY17E, and pending completion of the 1st tranche of the placement in FY17 which would help lower financing cost. Distribution-wise, an interim dividend of 2.17 sen was declared (which includes a 0.14 sen non-taxable portion), bringing 1H17 GDPU to 4.32 sen. This is within our expectations; making up 50% of our FY17E GDPU of 8.5 sen. Note that 1H17 distribution includes 0.12 sen gains on disposal from Axis Eureka, which have already been accounted by us. Additionally, our FY17E GDPU also accounted for the placement which is yet to be completed. Assuming no placement, 1H17 GDPU makes up 45% of our FY17E.

Results Highlights. YoY-Ytd, 2H17 RNI was up by 4.0% driven by positive top-line growth (+1.8%) likely from positive rental reversion, and contribution from Scomi Facility Rawang (acquired in Aug 2016), and better net margin (+1.5%) on lower operating cost and expenditure. QoQ, RNI was up by 3.2% despite a weak top-line (-2.4%), but EBIT margin improved (+2.4%) on lower operating cost, and lower financing cost (-4.3%) which helped bottom-line growth.

Kuantan industrial asset acquisition neutral-to-mildly positive. AXREIT announced the acquisition of an industrial facility in Kuantan, Pahang for RM155m. We were not surprised as AXREIT had already announced a LO (Letter of Offer) back in Feb-17 while the expected net yield is decent at 7.0% vs. AXREIT’s recent acquisition yields of 7.0- 7.5%. All in, we are neutral in the near term as we expect the asset to contribute c.4% to FY18E earnings which is not overly significant, but we are positive in the long run as we like the long term lease of 15+5 years with a step up of 10% every 3 years providing long-term stability to the portfolio. (refer overleaf).

Outlook. AXREIT accepted a LO to acquire an industrial facility in Iskandar Puteri, Johor (on 7 Apr 2017) for RM50m. As asset details are scarce pending the SPA announcement, we have yet to build this into our earnings estimates. We believe the Group will likely utilise part of the proceeds from the proposed 20% private placement soon, by 2H17 (announced 24th May-17, not completed) to pare down its gearing which is expected to increase to 0.39x in the near term (from 0.34x) post the Kuantan asset acquisition, as the Group’s gearing will breach its internal gearing limit of 0.35x. We make no changes to earnings pending the results briefing later today (refer overleaf).

Maintain MARKET PERFORM and TP of RM1.55. We maintain our TP of RM1.55 based on FY18E GDPS of 8.8 sen (post dilution from the placement) and on an unchanged +1.70ppt yield spread to our 10-year MGS target of 4.00%. 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. However, being highly institutionalized and one of the few Shariah-compliant MREITs offer some downside risk protection.

Source: Kenanga Research - 25 Jul 2017