1H18 realised net income (RNI) of RM48.1m is within our (48%) and market (46%) expectations. 1H18 GDPU of 3.94 sen is also within at 49%. Maintain FY18-19E CNP of RM99.7- 111.2m. FY18-19E earnings growth will be driven by recent acquisitions and contributions from greenfield developments. Maintain UNDERPERFORM and TP of RM1.25.

1H18 RNI of RM48.1m came within our and market expectations, at 48% and 46%, respectively. A second interim dividend of 2.00 sen (which includes a 0.45 sen non-taxable portion) was declared, bringing 1H18 GDPU to 3.94 sen. This is also within our expectation at 49% of our FY18E GDPU of 8.1 sen, implying 5.5% gross yield.

Results highlights. YoY-Ytd, top-line was up by 9.8% on higher rental from existing assets as well as rental from new acquisitions, Kerry Warehouse (competed in 3Q17) and Wasco Facility (completed in 4Q17). All in, RNI increased by 3.8% despite being weighed down by higher: (i) expenditure (+26.2%), and (ii) financing cost (+19.8%) on increased borrowings from recent acquisitions. QoQ, top-line was up by 4.7% due to similar reasons mentioned above. However, higher operating cost (+7.2%) and higher financing cost (+14.6%) from recent acquisitions caused RNI to increase by 3.1%.

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 potential acquisitions. FY18-19 growth is expected to be 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 RM99.7-111.2m. Our FY18-19E GDPU of 8.1-9.0 sen implies FY18-19E gross yield/net yield of 5.5-6.1%/4.9- 5.5%.

Maintain UNDERPERFORM and TP of RM1.25. 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 4.20%. Our applied spread is +0.5SD above historical averages to serve as a buffer for near-term fluctuations to the MGS on oversupply issues and interest rate hikes, but we may look to remove this going forward once confidence returns to MREITs’ valuations. We maintain our UNDERPERFORM call, which is premised on our lackluster outlook on the sector as we remain conservative on valuations, coupled with AXREIT’s gross yield of 5.5%, which is below large cap MREIT peers’ average of 6.0%.

Risks to our call include: (i) bond yield compression vs. our target 10- year MGS yield, and (ii) stronger than expected rental income.

Source: Kenanga Research - 07 Aug 2018