9M17 realised net income (RNI) of RM68.4m is broadly within our (74%) and consensus (72%) expectations. 9M17 GDPU of 6.32 sen is broadly within (86%) post accounting for the placement by 4Q17. Maintain FY17-18E earnings of RM92.4- 119.9m. FY18E will see earnings improvements from the recent acquisitions, Axis PDI and lower financing cost post placement. Maintain MP and TP of RM1.48 on FY18E GDPS and +1.80ppt to our 10-year MGS target of 4.00%.

9M17 RNI of RM68.4m came in broadly within our and consensus expectations at 74% and 72%, respectively. We believe the results are broadly within on expectations of a stronger 4Q17 from; (i) the acquisition of Kerry Warehouse (completed in 3Q17), (ii) completion of acquisition of the Kuantan Industrial asset by 4Q17 (RM155m), (iii) marginally lower financing cost from the first tranche of the placement in 4Q17, and (iv) securing new tenants at Delfi Warehouse and D21 Logistics warehouse (vacant since 1Q17 and 2Q17, respectively). An interim dividend of 2.00 sen (which includes a 0.06 sen non-taxable portion) was declared, bringing 9M17 GDPU to 6.32 sen (86% of our FY17E GDPU of 7.40 sen). However, we deem it as broadly within expectation as our FY17E GDPU has accounted for the first tranche of the 20% placement which is yet to be completed (by 4Q17). Assuming no placement, 9M17 GDPU makes up 76% of our FY17E earnings. Note that the Income Distribution Reinvestment Plan is applicable for 3Q17 distribution, with an electable portion of 1.00 sen (50% of 3Q17 payout).

Results Highlights. YoY-Ytd, 9M17 RNI was up by 1.9% driven by positive top-line growth (+1.4%) from positive rental reversion (+5.9%) and stable occupancy at 90% (from 89% in 2Q17), while both EBIT and net margins were stable. QoQ, top-line was up marginally by 0.9%. However, net margin declined by 2.0ppt on higher: (i) operating cost (+14.8%), (ii) expenditure (+6.8%), and (iii) financing cost (+8.8%) likely on higher cost post the acquisition of Kerry Warehouse in 3Q17, causing RNI to decline by 6.5%.

Outlook. FY17-18 will see minimal lease expiring at 17.5-15.0% of portfolio NLA. AXREIT has a pending Letter of Offer (LO) to acquire an industrial facility in Iskandar Puteri, Johor (on 7 Apr 2017) for RM50m and industrial facility in Senawang, Negeri Sembilan. We have yet to account for earnings contributions as asset details are scarce pending the SPA announcement. We believe the Group will likely utilise part of the proceeds from the proposed 20% private placement by 4Q17 (announced 24th May-17, not completed yet) to pare down its gearing which is expected to increase to 0.39x in the near term post the Kuantan asset acquisition (expected completion by 4Q17), as the Group’s gearing will breach its internal gearing limit of 0.35x. *Note that we make no changes to FY17-18E earnings of RM92.4-119.9m.

Maintain MARKET PERFORM and TP to RM1.48. Our TP is based on FY18E GDPS/NDPS of 8.6 sen/7.7 sen post dilution from the placement and on an unchanged +1.80ppt 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, these consideration should 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 - 24 Oct 2017