AXREIT has proposed to acquire an industrial facility in Shah Alam for RM87m. We were not surprised and are fairly neutral on the acquisition as net yield is decent at 7.0% while impact to earnings is minimal at 2% each in FY18-19. All in we increase earnings to RM99.6-110.1m for FY18-19. Maintain MARKET PERFORM call but increase TP to RM1.30 (from RM1.25).

Acquiring more industrial assets. AXREIT announced the proposed acquisition of two adjoining parcels of industrial land comprising of four warehouse blocks, a double-storey detached office building, a doublestorey canteen building and two guardhouses for a cash consideration of RM87m in Shah Alam. The acquisition is expected to be completed by 2H18. The property will be leased back to Teraju Sinar Sdn. Bhd. (TSSB) which specialises in trading of air-conditioners, assembling and trading of audio-video products and renting of properties, for a 6-year period at 100% occupancy.

Neutral on the acquisition. We were not surprised as this asset was one of AXREIT’s targeted acquisitions which had a pending Letter of Offer (LO). The asset’s net yield is also decent at 7.0% which is in line with AXREIT’s recent industrial acquisitions net yields ranging from 7.0- 7.5%. All in, we are fairly neutral on the acquisition as the impact to earnings is not overly significant. However, we do favour industrial asset acquisitions over multi-tenanted office spaces due to the long-term earnings stability from longer lease terms. Additionally, due to the single tenancy nature, there is less risk of losing tenants, while occupancy is maximised.

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, and (ii) three industrial facilities in Indahpura, Johor for RM45.2m. We have yet to account for earnings contributions as details are sketchy pending 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.

We increase our FY18-19E CNP by 2% each to RM99.6-110.1m post accounting for five months contribution in FY18 and full-year contributions in FY19, and on the back of higher borrowing cost to fund the acquisition. All in, we have increased our FY18-19E GDPU by 2% each to 8.1-8.9 sen (from 7.9-8.7 sen), implying FY18-19E gross yield/net yield of 5.8-6.4%/5.2-5.7%. Our FY18-19E gearing is increased to 0.40-0.40x (from 0.38-0.38x).

Maintain MARKET PERFORM but increase TP to RM1.30 (from RM1.25). Our TP is based on a higher FY18E GDPS/NDPS of 8.1 sen/7.3 sen (from 7.9 sen/7.1 sen). This is on an unchanged +2.4ppt yield spread to our 10-year MGS target of 4.00%. Our applied spread is +0.5SD above historical averages to encapsulate investors’ concerns of oversupply issues and OPR hikes, but we may look to remove this going forward once confidence returns to the sector. 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 yield of 5.8%, which is close to large cap MREIT peers’ average of 6.1%. Furthermore, AXREIT’s shareholding is highly institutionalized and being one of the few Shariah-compliant MREITs, this should offer some downside risk protection.

Source: Kenanga Research - 24 Apr 2018