FY18 realised net income (RNI) of RM113.4m is above our (114%) and market (108%) expectations on stronger-than- expected top-line and CNP margin. We will seek further clarity in the results’ briefing later today. FY18 GDPU of 8.74 sen is also above at 108%. Increase FY19E CNP by 3% and introduce FY20E numbers. FY19E earnings growth will be driven by acquisitions and greenfield developments. Upgrade to MP on a higher TP of RM1.50 (from RM1.35).

FY18 RNI of RM113.4m came in above our and market expectations, at 114% and 108%, respectively. The deviation from our estimates was due to top-line exceeding our expectations by 5%, while RNI margin was also stronger than expected at 54% (vs. ours of 50%). We will seek further clarity from management at the results briefing today. A fourth interim dividend of 2.45 sen (which includes 2.04 sen non-taxable portion) was declared, bringing FY18 GDPU to 8.74 sen (implying 5.3% gross yield) which is also above our expectation (108%).

Results’ highlights. YoY-Ytd, top-line was up by 21.4%, likely on improved rental and occupancy for existing assets, as well as contributions from newly acquired properties namely: (i) Kerry Warehouse (completed in 3Q17), (ii) Wasco Facility (completed in 4Q17), (iii) Axis Mega DC (completed end 2Q18) as well as the commencement of lease of (iv) Upeca Aerotech Sdn Bhd and Senawang Industrial property in Dec 2018. All in, RNI was up by 25% despite the higher financing cost (+28%) and expenditure (+16%) incurred for the recent acquisitions. QoQ, top-line was up by 16.1% possibly due to similar reasons mentioned above. Meanwhile, bottom- line margin expanded by 3.3ppt despite the marginal increase to operating cost (+2.3%), expenditure (+6.7%) and flattish financing cost, causing RNI to increase by 23.2%.

Outlook. FY19-20 is expected to see minimal leases expiries at 21-17% 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 finance bite-size acquisitions such as this, while larger acquisitions, if any, may require a cash call (current gearing is 0.37x). FY19 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, which will see full-year contribution in FY19.

Increase FY19E CNP by 3% to RM115m and introduce FY20E CNP of RM116m. We up our earnings on CNP margin improvement (to 53% from 51%), while we also seek further clarity from management on the reasons for the strong top-line growth in 4Q18, which may prompt us to hike earnings further post briefing. Our FY19-20E GDPU of 9.3-9.4 sen (from 9.1 sen in FY19E) implies gross yield/net yield of 5.6-5.7%/5.1- 5.1%.

Upgrade to MARKET PERFORM (from UNDERPERFORM) on a higher TP of RM1.50 (from RM1.35) post increasing our FY19E GDPS/NDPS of 9.3 sen/8.4 sen on a lower +2.0ppt spread (from +2.4ppt) to our 10-year MGS target of 4.20%. We lower our spread closer to stable retail MREITs’ spreads under our coverage of (+1.4ppt to 2.1ppt) for AXREIT’s attractive top-line growth and CNP margin of 54% (vs. MREIT peers’ average of 50%). We are comfortable with our MARKET PERFORM call as current FY19 gross yield of 5.6% is close to large cap MREIT peers’ average of 6.0%.

Source: Kenanga Research - 23 Jan 2019