AXREIT has proposed two industrial acquisitions in Nusajaya, Johor for RM55.8m, fully funded by borrowings and to be completed by end FY19. The assets are fully tenanted for the next 3-5 years and promise decent gross yields of 7.5-8.0% which are close to recent acquisitions’ yields. However, we expect a minimal impact to FY20E CNP, by +0.8% as imputed. Maintain MP and TP of RM1.85.

Asset acquisition in Nusajaya, Johor AXREIT has proposed to acquire two industrial properties for a total cash consideration of RM55.8m from Nusajaya Tech Park Sdn. Bhd. (NTP) in Taman Teknologi Nusajaya, Iskandar Puteri, Johor. Property 1 is acquired for RM42.0m and will be leased at 100% occupancy for another 5 years with the option to renew for 6 more years, while Property 2 will be acquired for RM13.8m and leased for the next 3 years with the option to renew for an additional 5 years. The acquisitions will be funded by borrowings and completed by end FY19, accreting fully in FY20.

Fully tenanted in Johor with decent gross yields of 7.5% (Property 1) and 8.0% (Property 2). We were not surprised as we have been waiting for the completion of this asset pending the due diligence. We take comfort in its decent gross yields of 7.5% and 8.0%, respectively, which is close to its more recent acquisition yields of between c.7.5- 9.0%. That said, we are fairly neutral as the acquisition has minimal impact to earnings of <1% given AXREIT’s large portfolio with investment properties totalling RM2.8b.

Outlook. FY19-20 is expected to see minimal leases expiring at 22- 18% of portfolio’s NLA. Post this acquisition, AXREIT is eyeing industrial assets totalling RM166m by end FY19. We like industrial assets, which provide earnings and DPU stability, operating in a more resilient segment vs. retail, office or hospitality based MREITs. Details are scarce pending the finalised SPA, but based on our back of the envelope calculations, we estimate that all these assets could potentially increase FY20E DPU by 2% while its gearing would increase to 0.44x (from 0.41x post this acquisition). 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 FY19E CNP but increase FY20E CNP by 0.8% to RM118m post accounting for this acquisition which we expect to fully accrete in FY20. As a result, our FY19-FY20E GDPU is 9.3-9.6 sen (from 9.3-9.5 sen) which implies gross/net yields of 5.0-5.1%/4.5-4.6% while our FY19-20E gearing assumptions are increased slightly to 0.41-0.41x (from 0.40-0.40x).

Maintain MARKET PERFORM and Target Price of RM1.85. Our TP is based on a marginally higher FY20E GDPU/NDPU of 9.6 sen/8.6 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. Hence, we believe our valuations are fair despite awarding it a premium via thin spreads. However, upsides are limited as gross yield of 5.2% is slightly below large cap comparable peers’ average of 5.4%.

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 - 14 Aug 2019