9M18 realised net income (RNI) of RM77.4m is within our (78%) and market (73%) expectations. 9M18 GDPU of 6.29 sen is also within at 78%. Maintain FY18-19E CNP of RM99.7- 111.7m. FY18-19E earnings growth will be driven by acquisitions and contributions from greenfield developments. Maintain UNDERPERFORM and TP of RM1.35 as AXREIT's FY19E gross yield of 6.0% is below large cap MREIT peers’ average of 6.4%.

9M18 RNI of RM77.4m came within our and market expectations, at 78% and 73% of respective full-year forecasts. A third interim dividend of 2.35 sen (which includes 0.46 sen non-taxable portion) was declared, bringing 9M18 GDPU to 6.29 sen. This is also within our expectation at 78% of our FY18E GDPU of 8.1 sen, implying 5.4% gross yield. Additionally, AXREIT's IDRP is also applicable to the Third Interim Income Distribution, in which a gross electable portion of 1.10 sen can be reinvested in new units and the remaining 1.25 sen be paid in cash, or shareholders can opt to reinvest part of the electable portion (i.e.0.55 sen) and the remaining 0.55 sen paid in cash.

Results highlights. YoY-Ytd, top-line was up by 14.6% on positive reversions (+6%), slightly better portfolio occupancy 94.8% (from 90.1% in 3Q17), as well as new acquisitions; (i) Kerry Warehouse (completed in 3Q17), (ii) Wasco Facility (completed in 4Q17) and Axis Mega DC (completed end 2Q18). All in, RNI was up by 13.2% despite a marginal increase in: (i) expenditure (+22.2%), and (ii) financing cost (+24.5%) from increased borrowings for recent acquisitions. QoQ, top-line was up by 10.2% due to similar reasons mentioned above. RNI margins improved by 4.4ppt on; (i) slightly lower operating cost (-6.7%) from lower other property operating expenses, and (ii) lower expenditure (- 9.4%) from reduced administrative expense. All in, this helped RNI increase by 19.9%, despite higher financing cost (+10.9%) for Axis Mega DC.

Outlook. FY18-19 will see minimal leases expiring at 15.4-21.0% of portfolio’s NLA. The Group accepted a letter of offer for the proposed acquisition of an industrial facility in Bayan Lepas, Penang for RM20.5m, while further details are lacking pending the SPA. We believe the Group will likely incur borrowings to fund bite size acquisitions such as this, while larger acquisitions, if any, may require a cash call (current gearing is 0.37x). FY18-19E 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.

Maintain FY18-19E CNP of RM99.7-111.7m. Our FY18-19E GDPU of 8.1-9.1 sen implies FY18-19E gross yield/net yield of 5.4-6.0%/4.8- 5.4%.

Maintain UNDERPERFORM and TP of RM1.35. Our TP is based on FY19E GDPS/NDPS of 9.1 sen/8.1 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 FY19 gross yield of 6.0%, which is below large cap MREIT peers’ average of 6.4%.

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 - 23 Oct 2018