AXREIT has proposed a private placement of up to 20% of approved fund size, potentially raising RM433m to pare down borrowings in FY20. Neutral and not surprised as AXREIT’s gearing is high at 0.40x, but we expect the Group to only utilise 10% placement to avoid over dilution, for now. Full-year impact to increase FY20 CNP by 8%, but mildly dilutive to DPU (-2%). For upcoming acquisitions, we expect neutral DPU impact. Maintain OP with TP of RM2.00.

Private placement of up to 20% of AXREIT’s existing approved fund size (up to 247.5m units), potentially raising RM433m based on the illustrative issue price of RM1.75 (4% discount to the 5-day VWAMP), which will be utilised to pare down borrowings. The proposed placement may be implemented in a single tranche or in multiple tranches while the actual number of units to be issued, and priced, will be determined at a later stage. The placement is expected to be completed by end of FY19, and should fully accrete by FY20.

No surprises. The placement was well within expectation and we are neutral as this is a normal course of business for AXREIT to pare down borrowings via placements once gearing gets close to its internal gearing limit of 0.35-0.40x. Note that AXREIT gearing is currently at 0.40x which we estimate to increase to 0.43x in FY20 on the back of recent acquisitions. As such, a placement will provide AXREIT with sufficient headroom for future asset acquisitions. Additionally, the increase in the number of units will enhance trading liquidity.

FY20 CNP +8%, but GDPU -2% to 9.43 sen, post 10% dilution. All in, we are assuming a 10% placement (1st tranche) for now to avoid over dilution to AXREIT share base, and a strong boost to earnings from lower financing cost. Recall that AXREIT’s previously proposed placement in 2017 was also up to 20% but the Group only utilised 10% then. All in, a 10% placement would increase our FY20E CNP by 8% to RM129m, but lower FY20 GDPU by 2% to 9.43 sen from dilution post placement. (refer overleaf) Note that we have yet to impute AXREIT’s three acquisitions worth RM152m that have a Letter Offer (LO), but further details are scarce pending the SPA announcement. We expect completion by end FY19 or early FY20, fully financed by borrowings and we estimate this to increase FY20 GDPU by 0.2% to 9.66 sen (vs. 9.64 sen pre-placement). As such we believe the Group would only utilise a 10% placement for now, while a larger acquisition pipeline would imply a 2nd trance of placement in FY20. All in, a 10% placement is expected to lower our FY19-20 gearing to 0.34-0.37x (from 0.41- 0.43x). Our FY19-20E GDPU of 8.45-9.43 sen implies gross/net yield of 4.8-5.4%/4.3-4.9%.

Maintain OUTPERFORM and Target Price of RM2.00. Our TP is unchanged due to marginal decrease in FY20E GDPU/NDPU of 9.43 sen/8.49 sen (from 9.66 sen/8.69 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). Our OP call is supported by the bullish acquisition momentum while multiple bite-size acquisitions throughout the year have also proven to be both earnings and DPU accretive. We like AXREIT for its ability to provide DPU stability from long-term leases (WALE of 6 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, FY20E 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.

Earnings largely unchanged. All in, a 10% placement would increase our FY20E CNP by 8% to RM129m, but lower FY20 GDPU by 2% to 9.43 sen from dilution post placement. FY19 impact is largely unchanged with a slight increase to FY19 CNP by 0.1% to RM115m while the enlarged share base (10% dilution) would be more reflective in FY20 upon full-year impact of the lower financing cost.

Source: Kenanga Research - 30 Oct 2019