AXREIT has proposed to acquire an industrial facility comprising two factories in i-Park, Johor for RM38.7m. We were not surprised and are neutral on the bite-size acquisition as there is no material impact to earnings, while asset net yields are decent at 6.8-6.9%. Earnings are largely unchanged as we adjust FY19E CNP by only +1%. Maintain UNDERPERFORM and TP of RM1.25.

Another industrial asset acquisition in i-Park, Johor. AXREIT has entered into a sale and purchase agreement with Axis AME IP Sdn. Bhd (AAIP) to acquire two factories (Property 1 and Property 2) in Kawasan Perindustrian i-Park, Kulai, Johor for a cash consideration of RM38.7m. Each asset comprises of a single-storey detached factory with a mezzanine office and other ancillary buildings. Property 1 will be leased to Beyonics Precision Malaysia Sdn. Bhd. for a fixed period of 10 years, while Property 2 will be leased to Oerlikon Balzers Coating Malaysia Sdn. Bhd for a fixed period of 7 years, both at 100% occupancy. The acquisition is expected to be completed by 3Q18. This is AXREIT’s second acquisition at i-Park since Nov 2015 when the group acquired four single-storey detached factories, annexed with two-storey office for RM61m. (refer overleaf).

Neutral acquisition impact. We were not surprised as this acquisition was highlighted previously, pending due diligence on the Letter of Offer (LO). Asset net yields are considered decent at 6.8% for Property 1 and 6.9% for Property 2 which is a tad lower than AXREIT’s recent industrial acquisitions asset net yields ranging from 7.0-7.5%, while AXREIT’s previous acquisition at i-Park, Johor commanded asset net yields of 7.1%. We are neutral on the acquisition as the impact to earnings is rather muted in the near term, but we do favour the single tenanted long-term lease structure on industrial assets (vs. multi-tenanted office spaces) as it ensures long-term earnings stability with less risk of losing tenants, while occupancy is maximised.

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; an industrial facility in Senawang, Negeri Sembilan for RM18.5m. 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.

Earnings largely unchanged. Post accounting for the impact to earnings, FY18-19E CNP is adjusted by 0-1% to RM99.7-111.2m. Our FY18-19E GDPU of 8.1-9.0 sen (8.1-8.9 sen) implies gross yield/net yield of 5.2-5.9%/4.7-5.3%. Our FY18-19E gearing is increased to 0.40- 0.41x (from 0.40-0.40x).

Maintain UNDERPERFORM and TP of RM1.25. Our TP is based on an unchanged FY18E GDPS/NDPS of 8.1 sen/7.3 sen on an unchanged +2.4ppt yield spread to our 10-year MGS target of 4.20%. Note that we recently increased our 10-year MGS target on concerns of a rising 10-year MGS from negative news flow and potential impact from the rating agencies. Additionally, 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 UNDERPERFORM call as AXREITs earnings and valuations outlook appear lackluster despite positives already mostly priced-in. FY18 gross yield of 5.3% is below large cap MREIT peers’ average of 5.9%.

Source: Kenanga Research - 8 Jun 2018