1Q18 realised net income (RNI) of RM23.7m is within our (24%) and market (23%) expectations. 1Q18 GDPU of 1.94 sen is also within at 24%. Maintain FY18-19E CNP of RM99.6- 110.1m. FY18-19E earnings growth will be driven by recent acquisitions and contributions from greenfield developments. Maintain MARKET PERFORM and TP of RM1.30.

1Q18 RNI of RM23.7m came within our and market expectations, at 24% and 23%, respectively. A first interim dividend of 1.94 sen (which includes a 0.46 sen non-taxable portion) was declared. This is also within our expectation, making up 24% of our FY18E GDPU of 8.10 sen, implying 5.9% gross yields.

Results Highlights. YoY, top-line was up by 6.0% on positive rental reversions and higher occupancy of 93.7%% (from 91.9% in 1Q17), as well as increased rental from new acquisitions, Kerry Warehouse (competed in 3Q17) and Wasco Facility (completed in 4Q17). This allowed EBIT margin to improve by 1.0ppt despite higher operating cost (+4%) and expenditure (+19%). Additionally, financing cost increased by 9.2% on higher borrowings for recent acquisitions, resulting in RNI increasing by 3.9%. QoQ, top-line was up by 5.8% due to similar reasons mentioned above, which resulted in RNI increasing by 5.5% on flattish RNI margins. Note that there was a RM7.4m revaluation gain during the quarter.

Outlook. FY18-19 will see minimal leases expiring at 16.8-14.6% 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 Axis Mega Distribution Centre Phase 1 (previously known as Axis PDI Centre) and its second greenfield for Upeca Technologies Sdn Bhd at Subang. Maintain FY18-19E CNP of RM99.6-110.1m. Our FY18-19E GDPU of 8.1-8.9 sen implies FY18-19E gross yield/net yield of 5.9-6.5%/5.3- 5.8%.

Maintain MARKET PERFORM and TP of RM1.30. Our TP is based on FY18E GDPS/NDPS of 8.1 sen/7.3 sen on an unchanged +2.40ppt 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. 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 5.9%, which is close to large cap MREIT peers’ average of 6.2%. AXREIT is highly institutionalized and one of the few Shariah-compliant MREITs, which 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 - 26 Apr 2018