4Q16 meeting expectations

• Axis REIT's (AxREIT) FY16 realised earnings of RM90.8m (-0.8% y-o-y) was in line with our and consensus expectations. The increase in rental income of RM167.4m (+2.2%) was negated by the increase in property expenses of RM50.1m (+3.4% y-o-y).

• A total of RM11.3m was incurred for enhancement of the properties of Axis REIT and for the Axis PDI development project in FY16.

• 4QFY16 recorded a core distributable income of RM23.1m (+6.3% y-o-y), boosted by rental income growth of 6% to RM42.2m.The rise in rental income is due to the inclusion of Beyonics i-Park Campus. Nonetheless, NPI margin and occupancy rate remained steady at 84.8% and 91% respectively. A revaluation gain of RM0.2m was registered in the quarter owing to Wisma Kemajuan, Seberang Perai Logistic Warehouse, Axis Eureka, and Axis SiLC.

• DPU of 2.10 sen was announced for 4Q16 with the exdate set on 31 Jan, implying a 99.94% payout.

Outlook

Major asset enhancement. AxREIT is planning to undertake enhancement works on the currently vacant Axis PDI Centre, Klang, turning it into a mega-distribution centre, which are slated for completion by 1Q18. We believe this will contribute positively to AxREIT’s future earnings as there is a stable market for logistics and warehousing facilities. Furthermore, it has signed an agreement with Nestle Products Sdn Bhd to develop a distribution warehouse on part of the Axis PDI Centre land for a lease term of 10+3+3 years.

Plans to grow asset base. In FY16, AxREIT completed the acquisition of Beyonics i-Park Campus worth RM61m and signed two SPAs for the proposed acquisitions of industrial warehouses worth RM75m in Pasir Gudang Johor and Rawang. Management is currently assessing three industrial facilities for potential acquisitions worth RM230m at Negeri Sembilan (RM20m), Selangor (RM80m) and Kedah (RM130m).

Filling up vacancies in FY17. In AxREIT’s portfolio, there are two vacant properties and nine properties with occupancy rates of below 85%. Management is still working to find tenants for Axis Business Campus which is currently vacant, while Axis PDI is undergoing re-development works. Overall portfolio occupancy stood at 91% as at end-4Q16. Management has guided that the remaining 9% vacancy has potential earnings uplift of RM18.9m. As such, reaching total occupancy could boost its DPU by 10% in FY17. By NLA, 17% of overall leases are expiring in FY17, split between office-related assets (7%) and industrial/others (10%). This poses renewal risks given the competitive office space environment.

Valuation

Our DDM-derived TP is RM1.80, with 7.12% cost of equity and 1.25% terminal growth. We maintain our HOLD call in view of the limited earnings upside potential in FY17.

Key risk

Pace of acquisitions and replenishments. Delays in completing acquisition targets and/or replenishing expiring tenancies may pose downside risks to DPU.

Source: Alliance Research - 19 Jan 2017