We came away from AXREIT’s briefing feeling assured on its long-term earnings and dividends sustainability as occupancy remains stable on mildly positive reversions. Going forward, we expect more acquisitions of industrial assets, totalling RM222m to be completed by end-FY19, which come with favourable long-term leases, but we reckon the impact to bottom-line is a minimal c.3% (pending the finalised SPA’s and potential placement). Maintain MP and TP of RM1.85.

Results within, on stable portfolio occupancy of 95%. We came away from AXREIT’s briefing feeling comforted on its long-term prospects. 1H19 results met expectations, which were driven by stable portfolio occupancy of 95% (vs. 94% in 1Q19) from improved occupancy in Axis Business Park and Menara Axis, but mildly offset by slight declines in Wisma Kemajuan and Axis Business Campus (refer to table in overleaf).

Expecting to maintain low single-digit reversions. Going forward, we expect our low single-digit reversions outlook to hold, and we believe this is achievable given AXREIT’s predominantly industrial asset profile. Meanwhile, downsides are limited as only 5% of NLA consist of pure office space, which tends to be a more volatile segment due to higher movement of tenants from shorter term lease tenures for offices (5-6 years) vs. industrial spaces (5-15 years), and exacerbated by the oversupply in office spaces in the Klang Valley.

Actively acquiring, targeting 6 assets totalling RM222m by end FY19. We like AXREIT for its aggressive acquisition path and the fact that it favours long-term leases in the industrial space providing earnings and DPU stability as it operates within a more resilient segment vs. retail, office or hospitality based MREITs. As mentioned yesterday, AXREIT has a letter of offer (LO) for five assets and has bid for a property in Nilai, Negeri Sembilan, all totalling to RM222m which is expected to be completed by end-FY19, pending the due diligence. Details are scarce pending the finalised SPA, but based on our back of the envelope calculations, assuming c.7% average NPI yield (in line with recent acquisitions), we estimate that all these assets could potentially increase FY20E DPU by 3% while its gearing would increase to 0.45x (from 0.40x). As such, we expect AXREIT to undertake a placement towards end-FY19 or early-FY20 post these acquisitions to pare down borrowings and reckon a 10% placement is more likely (to avoid over dilution), which would then lower FY20E gearing back to 0.38x.

Maintain FY19-20E CNP of RM114.9-117.1m. We make no changes to our earnings for now pending details of the above LO translating into SPA. However, we do not expect the impact to be overly significant to FY20 CNP, which would increase by 3% at best, implying a TP of RM1.90 on existing valuations, while this does not take into account potential dilutions, which would arise from the placement which depends on the quantum of the placement as well as pricing. Our unchanged FY19-20E GDPU of 9.3-9.5 sen implies gross/net yield of 5.0-5.1%/4.5- 4.6% while 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, we believe valuations are stretched as even on our thin spreads, upsides are limited while gross yield of 5.1% is on par with large cap comparable peers’ average of 5.1%.

Source: Kenanga Research - 26 Jul 2019