AXREIT is acquiring an industrial cum office facility in Nilai for RM50.0m. We were not surprised with this acquisition and have been anticipating it by end FY19. We like that the asset is fully tenanted for the next 10 years on decent gross yield of 7.5%. However, we expect minimal impact to FY20E CNP, by +0.5%, as imputed. Maintain OP and TP of RM2.00.

Asset acquisition in Nilai. AXREIT has proposed to acquire a warehouse cum office asset in Kawasan Perindustrian Nilai II, Nilai, Negeri Sembilan from K-Plastics Industries Sdn. Bhd for a lump sum consideration of RM50.0m. The asset is currently 100% occupied with a 10-year fixed lease term with the option to renew for another 5 years. The acquisition will be funded by borrowings and is expected to be completed by end FY19, accreting fully in FY20.

Neutral on the acquisition. The asset has a 10% step-up rate every 3 years, which amounts to an average gross yield of 7.5% over the 10- year period which is on the lower-end of more recent acquisition yields of between 7.5% and 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. We like the fact that AXREIT is continuously acquiring new industrial assets which provide long-term earnings and DPU stability due to the nature of the long-term leases for industrial assets and operating in the most resilient segment vs. other MREITs under our coverage (i.e. retail, office or hospitality). Additionally, the Group is eyeing industrial assets totalling RM166m in FY19, but details are scarce pending finalised SPA. However, 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 0.5% to RM119m post accounting for this acquisition which we expect to fully accrete in FY20. As a result, our FY19-FY20E GDPU is revised to 9.32-9.62 sen (from 9.32-9.57 sen) which implies gross/net yield of 5.1-5.3%/4.6-4.7% while our FY19-20E gearing remains at 0.41-0.41x.

Maintain OUTPERFORM and Target Price of RM2.00. Our TP is unchanged due to marginal increase in FY20E GDPU/NDPU of 9.62 sen/8.66 sen (from 9.57 sen/ 8.61 sen) on an unchanged +1.4ppt spread to our 10-year MGS target of 3.40%. Our applied spread is on the lower-end among MREITs under our coverage (+1.3ppt to +3.2ppt) and believe our OP call is justified as we like AXREIT for its strong active acquisition momentum 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 it is one of the few Shariah-compliant MREITs, making it a favourite among institutional investors. At current level, gross yield of 5.3% is close to MREITs’ average of 5.5%.

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

Source: Kenanga Research - 9 Oct 2019