AXREIT announced the proposed development of a single- storey manufacturing plant cum office building for Upeca Technologies Sdn Bhd at Subang, while leasing the land from MAHB for 49 years, for a total development cost of RM74m. Gross yields are decent at 7.6%. We were surprised, but neutral on the development due to minimal impact to earnings of c.3% to GRI in FY19. Maintain FY17- 18E numbers. Maintain MARKET PERFORM and TP of RM1.48.

Second greenfield development. AXREIT proposed to; (i) lease 7.02ac vacant land in Subang (within the proposed Malaysia International Aerospace Centre (MIAC) Technology Park, Sultan Abdul Aziz Shah Airport) from Malaysia Airports Holdings Berhad (MAHB) for RM19.8m, and (ii) develop and construct a single-storey manufacturing plant cum office building with a gross built-up area of approximately 178,978.6sf for a total development cost of RM53.5m which is expected to be completed by Dec 2018. AXREIT will then enter into an agreement with Upeca Technologies Sdn Bhd to sublease the land and facility for RM5.58m p.a., with and initial fixed lease period of 20 years and an agreed rental al step-up every 3 years (the quantum of which will be determined later) (refer overleaf).

Decent gross yields of 7.6%, but overall neutral on the development. We were fairly surprised on the acquisition as we did not expect a second greenfield development so soon, and were expecting more brownfield acquisition developments in 4Q17 instead (i.e. Iskandar Puteri asset in Johor). Although we favour long-term tenancies as they provide earnings stability, we are neutral on the acquisition due to the minimal earnings impact. We believe asset yields are also decent at 7.6% gross yield (7.0% net yield), which is similar to AXREIT’s first greenfield development, Axis PDI (7.6% gross yield) and within AXREIT’s recent targeted acquisition gross yields of 7.5-8.00%, while its portfolio gross yield stands at 9.6%.

Maintain FY17-18E of RM92.4-119.9m. We do not expect any impact to FY17-18E earnings as the development is slated for completion by 15 Dec 2017, while the total development cost of RM74m will be fully capitalised. As such, we expect earnings to accrete in FY19 with minimal impact to FY19 GRI of c.3%, while impact to earnings is c.1% post accounting for higher financing cost. We expect FY18E gearing to increase progressively to 0.27x by the end of the construction period (from 0.25x).

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 strong DPU accretive acquisitions and convincing near-term catalysts while most downsides have been accounted for. However, as it is highly institutionalized and one of the few Shariah-compliant MREITs, we believe this offers 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 - 02 Nov 2017