We attended AXREIT’s 1H18 briefing yesterday and came away feeling neutral of its future prospects as foreseeable positives and acquisitions have been accounted for. Occupancy is up slightly to 94% on healthy reversions of +5%. All in, FY18-19E CNP estimates remain unchanged at RM99.7-111.2m. However, we maintain UNDERPERFORM and TP of RM1.25 as the gross yield of 5.4% is below large cap MREITs’ average yield of 5.9%.

1H18 top-line up 9.8% on healthy fundamentals. To recap, 1H18 RNI came in within our and market expectations, at 48% and 46%, respectively. The Group saw positive top-line growth of 9.8% in 1H18 from; (i) higher occupancy of 94% in 2Q18 (vs. 93% in 1Q18 and 89% in 2Q17), (ii) positive reversions of +5.0% YTD (vs. 3.0% in 1Q18 and 5.9% in 1H17), and, (iii) new rental from acquisitions of Kerry Warehouse (competed in 3Q17), Wasco Facility (completed in 4Q17) and slight contributions to 2Q18 from Axis Shah Alam DC 4, which was completed in June 2018, and the lease for Axis Mega DC, which also commenced in June 2018 (refer overleaf for occupancy data).

However, higher cost from new acquisitions weighed down on margins. Notably the new acquisitions incurred higher cost from increased property expenses (+10.4%), and higher financing cost (+19.8%). As a result, RNI margin declined by 3.0ppt to 50.7%. However, we are not alarmed by the margin compression as this is largely within our expectations of 49.7-49.5% RNI margin in FY18-19E.

To improve occupancy and to complete pending acquisitions. AXREIT is working on improving occupancy at its existing assets, namely, Fonterra HQ, Infinite Centre, Wisma Kemajuan, Axis Technology Centre, Menara Axis, Axis Business Park, Quattro West, and Axis Business Campus. Assuming AXREIT can fill up the existing space at these assets, it is estimated that DPU could increase by 1.1 sen a year, which would increase our FY18E GDPU by 14% to 9.2 sen on an annualised basis, but we believe this may be challenging for now given demanding market conditions. All in, we are expecting occupancy of 92-94% in FY18-19 which we believe is fair.

Additionally, the Group also focuses on completing pending acquisitions, namely; (i) the manufacturing facility at Indahpura Johor (RM38.7m) by 2H18, and (ii) industrial facility in Senawang, Negeri Sembilan (RM18.5m) which is currently pending SPA by 2H18 while the impact to earnings is mostly neutral (refer overleaf). AXREIT is not targeting any asset disposals in the near term as most of its older assets are commanding attractive yields ranging from 7.9-13.6% net vs. the current acquisition climate which commands c.6.0-7.5%.

We maintain FY18-19E CNP of RM99.7-111.2m. Our FY18-19E GDPU of 8.1-8.9 sen implies FY18-19E gross yield/net yield of 5.4-6.0%/4.8- 5.4%.

Maintain UNDERPERFORM and TP of RM1.25. Our TP is based on FY18E GDPS/NDPS of 8.1 sen/7.3 sen on a +2.40ppt yield spread to our 10-year MGS target of 4.20%. Our applied spread is +0.5SD above historical averages 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. Our UNDERPERFORM call is premised on our lackluster outlook on the sector as we remain conservative on valuations, and as most foreseeable positives have already been priced in, while AXREIT’s gross yield of 5.4% is below large cap MREIT peers’ average of 5.9%.

Source: Kenanga Research - 08 Aug 2018