AXREIT is proposing to acquire an industrial asset in Senawang, Negeri Sembilan for RM18.5m. The acquisition was anticipated with the LO already issued by AXREIT. Neutral with no material impact to earnings despite attractive net yield of 7.7%. Earnings are largely unchanged as we adjust FY19E CNP by <1%. Maintain UNDERPERFORM and TP of RM1.25 as the gross yield of 5.4% is below large cap MREITs’ average yield of 6.0%.

Acquiring an industrial asset in Senawang, Negeri Sembilan. AXREIT via its trustee RHB Trustees Berhad (RHB), has proposed to acquire an industrial development in Senawang Industrial Park, Negeri Sembilan from Gandour (Malaysia) Sdn. Bhd (GMSB) for a cash consideration of RM18.5m. The property consists of a 3-storey office annexed with a 1.5-storey warehouse factory and other ancillary buildings, and will be tenanted out at 100% occupancy to Nippon Wiper Blade (M) Sdn. Bhd for 8 years up to 2026 (refer to overleaf for details). The acquisition will be funded by bank financing is expected to be completed by end of 2018.

Neutral on the acquisition. The acquisition was well within expectations as AXREIT had already issued a Letter of Offer (LO). The asset net yield is attractive at 7.7%, which is at the higher end of AXREIT’s recent industrial asset acquisitions with net yields ranging from 7.0-7.5%, while AXREIT's portfolio net yield stands at 8.2%. We are neutral on this acquisition, as the impact to earnings is rather muted due to the small size of this asset as opposed to AXREIT’s portfolio (<1% of AXREIT total investment properties of RM2.7b). That said, we do favour long-term lease structures 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 15.4-21.3% of portfolio’s NLA. We believe the Group will likely incur borrowings to fund these potential acquisitions with no plans for cash calls in the near term. FY18-19 growth is expected to be driven by the inclusion of Axis Mega Distribution Centre Phase 1 (formerly known as Axis PDI Centre) from June 2018 and its second greenfield for Upeca Technologies Sdn Bhd at Subang by FY19.

Earnings largely unchanged. Post accounting for the acquisition, FY18E is unchanged while FY19E CNP is adjusted by <1% to RM111.7m. Our FY18-19E GDPU of 8.1-9.1 sen (from 8.1-9.0 sen) implies gross/net yields of 5.4-6.0%/4.8-5.4%. We also raise our FY18- 19E gearing assumptions to 0.41- 0.41x (from 0.40-0.41x).

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 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 - 09 Aug 2018