AXREIT will not be issuing the remaining tranche of its 20% proposed placement. As we had previously accounted for a 2nd tranche of the placement, we lower FY18-19E CNP by 5- 10% on higher borrowing cost but increase GDPU by 8-2% on a lower share base. FY18-19 growth is driven by two greenfield projects, Nestle Distribution Centre and Upeca Technologies Sdn Bhd. Upgrade to MARKET PERFORM (from UP) and increase TP to RM1.25 (from RM1.15).

AXREIT announced yesterday that it has no intention of issuing the remaining tranche of the placement and therefore deems the placement as completed. To recap, AXREIT proposed to undertake a private placement of up to 20% of its existing fund size in May 2017 and completed the 1st tranche in Nov 2017, issuing 125m units (43% of the proposed placement size).

We are mildly positive on this as we had expected the 2nd tranche of the placement to be used to pare down borrowings upon; (i) acquiring more assets in FY18, and (ii) on the back of higher borrowings for AXREITs greenfield projects. However, in light of this recent development, we believe that upcoming acquisition targets may be easily digestible ones given that the Group’s balance sheet (currently at 0.33x gearing), whilst minimising the impact of a dilution to shareholders. We had previously imputed for the placement in two tranches over FY17 and FY18 which would be used to pare down the Group’s borrowings. However, post excluding the effects of the 2nd tranche of the placement, we have increased our FY18-19E borrowing cost by 14-42% to RM34-41m, but lowered our share base by 14% each to 1,232m (from 1,399m).

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 incur borrowings to fund these potential acquisitions. FY18-19 growth is expected to driven by the inclusion of Nestle Distribution Centre (previously known as Axis PDI Centre) and its second greenfield for Upeca Technologies Sdn Bhd at Subang.

All in, we lowered our FY18-19E CNP by 5-10% to RM98-108m on higher borrowings. However, we have increased our FY18-19E GDPU by 8-2% to 7.9-8.7 sen (from 7.4-8.5 sen) post removing the dilution impact. This implies FY18-19E gross yield/net yield of 6.4-7.1%/5.8- 6.4%. Our FY18-19E gearing is increased to 0.38-0.38x (from 0.27- 0.28x).

Upgrade to MARKET PERFORM (from UP) and increase TP to RM1.25 (from RM1.15). Our TP is based on a higher FY18E GDPS/NDPS of 7.9 sen/7.1 sen (from 7.4 sen/6.6 sen), a net effect of lowering our earnings and share base. This is on an unchanged +2.30ppt yield spread to our 10-year MGS target of 4.00%. Our applied spread is higher than retail MREITs (1.3ppt to 1.9ppt) due to perceived earnings risk from weak occupancy of the office segment, and softer reversions and longer lease expiries vs. retail-based MREITs. Note that we have recently assumed a temporary risk premium (+50 bps) on all MREITs’ spreads to address investors’ concerns of an OPR hike. We are comfortable with our MARKET PERFORM call which is premised on our neutral outlook for AXREIT as we have priced in most positives and earnings risk for FY18, with gross yields of 6.4%, which is on par with large cap MREIT peers’ average of 6.6%.

Source: Kenanga Research - 28 Mar 2018