FY17 realised net income (RNI) of RM90.8m is within our and market expectations, both at 98%. FY17 GDPU of 8.26 sen, (7.50 sen post placement and IDRP in 4Q17) is also within (100%). Cut FY18E CNP to RM116.3m on lower occupancy, and introduce FY19E CNP of RM119.4m. FY18E will see earnings improvements on recent acquisitions, Axis PDI and lower financing cost post placement. Maintain MP but lower TP to RM1.45 (from RM1.48).

FY17 RNI of RM90.8m came within our and market expectations, both at 98%. A final dividend of 0.92 sen (which is non-taxable) and a fourth interim dividend of 1.02 sen announced on 9th Nov-17 (which includes a 0.26 sen non-taxable portion), brings FY17 GDPU to 8.26 sen (110% of our FY17E GDPU of 7.50 sen). However, we deem it as within expectation due to our larger FY17E share base of 1,232m (accounting for the first tranche of the placement and IDRP which only came in late 4Q17). Applying 4Q17 share base of 1,232m on RM92.5m total income distribution, FY17 GDPU is 7.50 sen which is within our expectation.

Results Highlights. YoY-Ytd, FY17 RNI was flattish (+0.7%) driven by mildly positive top-line growth (+1.1%) from positive rental reversion (+6.25%) and slightly lower occupancy of 91% (from 92% in 4Q16). Both EBIT and RNI margins were stable at 71% and 52%, respectively. QoQ, top-line was up marginally by 1.7% which resulted in RNI increasing by 2%. This was on the back of lower operating (-7.5%) and financing (-4%) costs likely due to partial paring down of debts post the placement.

Outlook. FY18-19 will see minimal leases expiring at 16.6-14.9% of portfolio’s NLA. AXREIT has a pending Letter of Offer (LO) to acquire; (i) an industrial facility in Senawang, Negeri Sembilan for RM18.5m, (ii) three industrial facilities in Indahpura, Johor for RM45.2m, and (iii) an industrial facility in Shah Alam for RM87.0m. We have yet to account for earnings contributions as asset details are sketchy pending the SPA announcement. We believe the Group will likely utilise the 2nd tranche of the proposed 20% private placement in FY18, while the 1st tranche was completed in FY17, as expected.

Lower FY18E CNP to RM116.3m (from RM119.9m) and introduce FY19E CNP of RM119.4m. We have lowered our earnings estimate by 3% for FY18 to account for lower occupancy for certain assets closer to current levels (refer overleaf). FY18 will see earnings improvements from the recent acquisitions of; (i) Kerry Warehouse (completed in 3Q17), (ii) Kuantan Industrial asset in 4Q17, (iii) Axis PDI coming online in 1Q18 (10% of GRI), and (iv) lower financing cost post the 2nd tranche of the placement.

Maintain MARKET PERFORM but lower TP to RM1.45 (from RM1.48). Our TP is based on a lower FY18E GDPS/NDPS of 8.3 sen/7.5 sen (from 8.6 sen/7.7 sen) post lowering our earnings estimates. This is on an unchanged +1.80ppt yield spread to our 10- year MGS target of 4.00%. Our applied spread is higher than retail MREITs (0.8ppt to 1.2ppt) due to perceived earnings risk from weak occupancy of the office segment, and softer reversions and longer lease expiries vs. retail-based MREITs. Our MARKET PERFORM call is premised on our neutral outlook for AXREIT as the market has priced in most of the positives for FY18, with gross yields of 6.0%, which is on par with large cap MREIT peers’ average of 5.9%. AXREIT is highly institutionalized and one of the few Shariah-compliant MREITs, which should offer some downside risk protection.

Source: Kenanga Research - 24 Jan 2018