AXREIT plans to acquire a factory in Bayan Lepas, Penang for RM20.5m from Zoomic Technology (M) Sdn. Bhd (ZTSB). The asset will be tenanted up to Jan FY21, with the option to renew for another 3 years. This bite-size acquisition implies a minimal impact to earnings of <1%, and as such we increase FY20E CNP by 0.5%. Maintain MP but increase TP to RM1.85 (from RM1.80) as we roll forward our valuation yardstick to FY20E.

Asset acquisition in Bayan Lepas. Hot on the heels of the proposed green-field development in Batu Kawan, Penang announced three days ago, AXREIT is acquiring an industrial facility in Bayan Lepas Free Industrial Zone Phase IV, Penang from Zoomic Technology (M) Sdn. Bhd (ZTSB) for RM20.5m. The facility is a double-storey factory-cum office building tenanted by Pentax Medical (Penang) Sdn Bhd (PMSB) which will have a fixed tenancy up to Jan 2021, with an option to renew for another 3 years. The acquisition will be completed by end FY19 while impact to earnings will be from FY20 onwards, and funded by existing borrowing facilities.

Insignificant impact to portfolio. We were not overly surprised by this acquisition as AXREIT had mentioned this previously during the LO (Letter of Offer) stage. Asset gross yield of 8.0% is slightly below AXREIT’s portfolio gross yield of 9.3%, but is on par with more recent acquisition yields between c.8.0-9.0%. We are largely neutral on this acquisition due to the minimal impact to earnings of <1% of AXREIT’s total investment properties of RM2.8b. Note that the lease tenure for this asset is shorter than most industrial asset acquisitions of between 5-10 years, but we are not overly concerned as impact to earnings is minimal (+0.5% of FY21E CNP) assuming the existing tenant decides to vacate the premises and the asset remains untenanted.

Outlook. FY19-20 is expected to see minimal leases expiring at 22- 18% of portfolio’s NLA. The Group accepted a letter of offer for two industrial facilities in Nusajaya, Johor for RM55.8m, but details are lacking, pending the SPA. We believe AXREIT will likely incur borrowings to finance bite-size acquisitions like the recent Penang acquisitions, while larger acquisitions, if any, may require a cash call (current gearing is 0.38x).

Maintain FY19E CNP but increase FY20E CNP by 0.5% to RM117.1m. Post accounting for this acquisition, we leave FY19E CNP unchanged but increase FY20E CNP by 0.5% to RM114.9-117.1m. Our FY19-20E GDPU of 9.3-9.5 sen (from 9.3-9.4 sen) implies gross/net yield of 5.1-5.2%/4.6-4.7%. Our FY19-20E gearing assumptions remains unchanged at 0.40-0.40x.

Maintain MARKET PERFORM but increase Target Price to RM1.85 (from RM1.80). Our TP is higher post rolling forward to FY20E GDPS/NDPS of 9.5 sen/8.5 sen on an unchanged +1.5ppt spread to our 10-year MGS target of 3.70%. We like AXREIT as it is actively acquiring assets to grow earnings, providing stable DPU from long-term leases (WALE of 6.2 years vs. prime retail REITs’ WALE of c.2-3 years), and is one of the very few Shariah-compliant MREITs, making it a favourite among institutional investors. However, even on our thin spreads, upsides are limited as gross yield of 5.2% is close to large cap comparable peers’ average of 5.1%.

Risks to our call include: (i) bond yield compression and expansion vs. our target 10-year MGS yield, and (ii) stronger-or-weaker-than expected rental income.

Source: Kenanga Research - 18 Jul 2019