AXREIT is acquiring an industrial-cum-office facility in Pelabuhan Tanjung Pelepas, Johor for RM65.0m. We are not surprised with this acquisition, as the Group has been actively seeking acquisition, but neutral on the asset acquisition due to minimal impact to earnings. We favour the long lease terms on decent gross yield of 7.4%. Increase FY20E CNP by 0.4%. Maintain OP and TP of RM2.00.

Asset acquisition in Johor. AXREIT has proposed to acquire a single- storey warehouse-cum-office building in Pelabuhan Tanjung Pelepas (PTP), Johor for RM65m from Johor Port Authority (JPA) and main lessee Pelabuhan Tanjung Pelepas Sdn. Bhd which operates and manages Pelabuhan Tanjung Pelepas under a licence by the JPA. The asset is currently 100% occupied with a 35-year 5-month sub-lease term. The asset will be occupied by Schenker Logistics (Malaysia) Sdn Bhd for the initial period of 10 years (starting September 2018), with an option to renew for another 5 years. The acquisition will be funded by borrowings and is expected to be completed by 1HCY20.

Neutral to earnings. The asset has an 11% step-up rate in year 6 onwards, and an average gross yield of 7.4% in year 1, and 8.2% gross yield in year 6, which is within the range of more recent acquisitions’ gross yields of between 7.5% and 9.0%. We view this single acquisition as neutral given the minimal impact to earnings of <1% vs. AXREIT’s large portfolio with investment properties totalling close to RM3b.

Outlook. FY19-20 is expected to see minimal leases expiring at 22- 18% of portfolio’s NLA. We like the fact that AXREIT is (i) 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 (ii) operating in the most resilient segment vs. other MREITs under our coverage (i.e. retail, office or hospitality). The Group is eyeing industrial assets totalling RM116m in FY19, one in Kota Kinabalu, Sabah and another in Shah Alam. 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 0.39x.

Maintain FY19E CNP but increase FY20E CNP by 0.4% to RM119.2m post accounting for this acquisition which we expect to accrete in 2HFY20. As a result, our FY19-20E GDPU is revised to 9.32- 9.66 sen (from 9.32-9.62 sen) which implies gross/net yield of 5.2- 5.4%/4.7-4.9%. Our FY19 gearing is maintained at 0.41x while FY20E gearing is increased to 0.43x (from 0.41x).

Maintain OUTPERFORM and Target Price of RM2.00. Our TP is unchanged due to marginal increase in FY20E GDPU/NDPU of 9.66 sen/8.69 sen (from 9.62 sen/8.66 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). We believe our OP call is justified due to its strong acquisition growth momentum. Despite the bite-size acquisition, all acquisitions have been both earnings and DPU accretive, whilst providing DPU stability from long-term leases (WALE of 6.2 years vs. prime retail REITs’ WALE of c.2-3 years). Additionally, AXREIT is one of the few Shariah-compliant MREITs, making it a favourite among institutional investors. At current level, gross yield of 5.4% is close to MREITs’ average of 5.5%.

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

Source: Kenanga Research - 15 Oct 2019