AXREIT is proposing to develop and sublease an industrial facility in Batu Kawan Industrial Park to FedEx at a development cost of RM15.8m. The project has a gross yield of 10.0% (net yield of 9.0%) which is better than previous greenfield projects. The development is expected to be completed by end FY19, with earnings accreting in FY20, but the impact to earnings is largely neutral. FY19E earnings unchanged but increase FY20E CNP by 0.6%. Maintain MARKET PERFOM and TP of RM1.80.

Greenfield development in Batu Kawan, Penang. AXREIT has proposed its 3rd green-field project, which is to lease land and develop an industrial facility in Batu Kawan Industrial Park on Penang Development Corporation’s (PDC) land, and sublease it to Federal Express Services (M) Sdn Bhd (FedEx). AXREIT will develop a courier facility for bonded and non-bonded warehouse for FedEx at an estimated development cost of RM15.8m, and this is expected to be completed by end FY19, while impact to earnings will accrete by 1Q20 post the Certificate of Completion and Compliance (CCC). AXREIT will utilise existing borrowing facilities to fund the leasing and development but impact to gearing is muted as it is a bite-size deal.

Neutral on the development. Although we like the fact that this development would command c.10.0% gross yield (net yield of 9.0%) which is higher than previous greenfield developments of 7.6% gross yield (7.0% net yield), we are largely neutral as the impact to earnings is mostly muted given its bite-size proportion as the development cost is <1% of AXREIT total investment properties of RM2.8b. However, we like the long-term earnings stability of this development’s lease structure, which is on a fixed lease period of 10 years with an option to renew for a further 5 years. In the current challenging property environment where tenant attrition is a risk, we favour earnings stability, which ensures DPU longevity.

Outlook. FY19-20 is expected to see minimal leases, at 22-18% of portfolio NLA, expiring. 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).

Minimal earnings impact. Post accounting for the development, we leave FY19E earnings unchanged but increase FY20E CNP by 0.6% to RM114.9-116.5m. Our FY19-20E GDPU of 9.3-9.4 sen implies gross/net yield of 5.3-5.3%/4.7-4.8%. Meanwhile our FY19-20E gearing assumptions are unchanged at 0.40-0.40x.

Maintain MARKET PERFORM on an unchanged Target Price of RM1.80 based on FY19E GDPS/NDPS of 9.3 sen/8.4 sen on a +1.5ppt spread to our 10-year MGS target of 3.70%. Our spread is on the lower end of prime retail MREITs’ spread under our coverage of (+1.3ppt to 1.8ppt) given AXREIT’s earnings resiliency from more long-term leases going forward (WALE of 6.2 years) which is preferred over prime retail REITs’ shorter term leases (WALE of c.2-3 years) under challenging macro conditions as both asset classes are commanding low single digit reversions. We believe AXREIT should command a premium as one of the few Shariah-compliant MREITs, making it a favourite among institutional investors. However, even on our thin spreads, upsides are limited as AXREIT’s FY19 gross yield of 5.3% is close to large cap comparable peers’ average of 5.1%.

Source: Kenanga Research - 16 Jul 2019