1H19 realised net income (RNI) of RM57.8m came in within our (50%) and consensus (48%) expectations. 1H19 GDPU of 4.71 sen is also within at 51%. Maintain FY19-20E CNP of RM115-117m. FY19E earnings growth will be driven by greenfield developments and positive reversions. Maintain MP and TP of RM1.85 given decent gross yield of 5.2%, close to comparable peers’ average of 5.1%.

1H19 RNI of RM57.8m came in within our and market expectations, at 50% and 48%, respectively. The Group also declared 2Q19 dividend of 2.36 sen (which includes 0.53 sen non-taxable portion) bringing 1H19 GDPU to 4.71 sen. This also met our expectation (51% of FY19E GDPU) of 9.31 sen, implying 5.1% gross yield.

Results’ highlights. YoY, top-line was up by 18%, likely on improved rental and stable occupancy for existing assets, as well as contributions from newly acquired properties, namely: (i) commencement of lease of Upeca Aerotech Sdn Bhd (in 4Q18), and (ii) Senawang Industrial property (completed in 4Q18). As a result, RNI was up by 20% despite higher financing cost (+28%) incurred for the recent acquisitions, but supported by solid NPI margin of (+1.6ppt). QoQ, top-line was down marginally by 2.3% likely due to movement of tenants. However, slightly higher financing cost (+2.1%) and expenditure (+4.6%) resulted in RNI increasing only slightly by 0.3%.

Outlook. FY19-20 is expected to see minimal leases expiries at 22-18% of portfolio’s NLA. The Group accepted; (i) a letter of offer (LO) for two industrial facilities in Nusajaya, Johor for RM55.8m, (ii) LO for two industrial facilities in Shah Alam for RM55.8m, (iii) LO for an industrial facility in Kota Kinabalu, Sabah for RM60.0m, and (iv) bid for a property in Nilai, Negeri Sembilan for RM50.0m, but further 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, may require a cash call (current gearing is 0.38x).

Maintain FY19-20E CNP of RM114.9-117.1m. Our unchanged FY19- 20E GDPU of 9.3-9.5 sen implies gross/net yields of 5.1-5.2%/4.6-4.6%. Our FY19-20E gearing assumptions are unchanged at 0.40-0.40x.

Maintain MARKET PERFORM and Target Price of RM1.85. Our TP is based on FY20E GDPU/NDPU 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 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 - 25 Jul 2019