1Q19 realised net income (RNI) of RM28.9m is well within our (25%) and market (24%) expectations. 1Q19 GDPU of 2.35 sen is also within at 25%. Maintain FY19-20E CNP of RM115-116m. FY19E earnings growth will be driven by recent acquisitions and greenfield developments. Maintain MP and TP of RM1.70 given decent gross yields of 5.3%, close to comparable peers’ average of 5.2%.

1Q19 RNI of RM28.9m came in within our and market expectations, at 25% and 24%, respectively. The declared 1Q19 dividend of 2.35 sen (which includes 0.51 sen non-taxable portion) also met our expectation at 25% of FY19E GDPU of 9.32 sen (implying 5.3% gross yield).

Results’ highlights. YoY, top-line was up by 22%, likely on improved rental and occupancy for existing assets, as well as contributions from newly acquired properties, namely: (i) Axis Mega DC (completed end 2Q18), (ii) commencement of lease of Upeca Aerotech Sdn Bhd (in 4Q18), and (iii) Senawang Industrial property (completed in 4Q18). As a result, RNI was up by 22% despite the higher financing cost (+35%) incurred for the recent acquisitions. QoQ, while its portfolio occupancy remained stable at 94%, top-line was down by 9.2% due to higher rental income recognised in 4Q18 on back-dated rental from Upeca Aerotech, which has normalised this quarter, coupled with higher operating cost (+7.4%) and higher financing cost (+7.9%) due to recent acquisitions driving RNI to decrease by 20.0%.

Outlook. FY19-20 is expected to see minimal leases expiries at 22-18% 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 and two industrial facilities in Nusajaya, Johor for RM55.8m, while further details are lacking, pending the SPA. We believe AXREIT 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 0.38x). AXREIT is already seeking the renewal for a 20% placement mandate in the upcoming AGM today, to ensure funds are readily available to pare down borrowings should a substantial acquisition arise. FY19 growth is expected to be driven by the full-year contribution 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 from Dec 2018.

Maintain FY19-20E CNP of RM115m-116m. We are expecting low single-digit reversions in FY19-20 of 3% each on minimal lease expiries of 22-18% of portfolio’s NLA. Our FY19-20E GDPU of 9.3-9.4 sen implies gross yield/net yield of 5.3-5.3%/4.7-4.8%.

Maintain MARKET PERFORM on an unchanged Target Price of RM1.70 based on FY19E GDPS/NDPS of 9.3 sen/8.4 sen on a +1.5ppt spread to our 10-year MGS target of 3.90%. Our spread is on the lower- end of prime retail MREITs’ spread under our coverage of (+1.3ppt to 1.8ppt) given AXREITs earnings resiliency from more long-term leases going forward (WALE of 6.2 years) which is preferred vs. prime retail REITs’ shorter term leases (WALE of c.2-3 years) under challenging macro conditions (i.e. space oversupply and tenant attrition), as both asset classes are commanding low single-digit reversions. Furthermore, we believe AXREIT should command a premium as one of the few Shariah-compliant MREITs, making it a favorite among institutional investors. However, even with our thin spreads, upsides are limited at this juncture as AXREIT’s FY19 gross yield of 5.3% is close to large cap comparable peers’ average of 5.2%. Maintain MARKET PERFORM.

Source: Kenanga Research - 30 Apr 2019