INVESTMENT HIGHLIGHTS

• FY16 earnings within expectations

• Marginal earnings growth in FY16

• Earnings forecast fine-tuned

• Maintain NEUTRAL with an unchanged TP of RM1.68

FY16 earnings within expectations. Axis REIT FY16 core net income of RM92.4m was within expectations, meeting 100% and 95% of our and consensus full year estimates respectively. Forth-interim distribution per unit (DPU) of 2.10 sen was declared, bringing total DPU to 8.25sen in FY16.

Marginal earnings growth in FY16. Axis REIT recorded higher 4QFY16 core net income of RM24.1m (+24%yoy) mainly buoyed by earnings contributions from newly acquired assets (Axis Shah Alam DC2 and Beyonics iPark Campus). On a cumulative basis, core net income of RM92.4m recorded marginal earnings growth of 2%yoy, in line with higher topline (+2%yoy). Earnings growth of Axis REIT was marginal in FY16 as higher rental income was offset by higher operating expenditure (+16%yoy) and higher Islamic financing cost (+6.9%yoy). The marginal earnings growth was also due to the contributions from newly acquired assets which were offset by loss of income from Axis PDI Centre (vacant since 4QFY15 for redevelopment). Recall that Axis REIT plans to construct a warehouse on Axis PDI site after securing long-term tenancy agreement with Nestlé Products Sdn Bhd while earnings contribution from the asset expected to kick in from FY18 onwards.

Earnings forecast fine-tuned. We have lowered our earnings forecast for FY17 marginally to reflect the loss of earnings from Axis Eureka. Recall that Axis REIT proposed to dispose the asset in October 2016. FY17 core net income expected to be flattish due to loss of earnings from Axis Eureka. Meanwhile, we also introduce our FY18 earnings forecast which implies earnings growth of 8.6%yoy mainly due to earnings contribution from Axis PDI Centre.

Maintain NEUTRAL with unchanged TP of RM1.68. Our TP is based on Dividend Discount Model (Required rate of return: 7.3%, Perpetual growth rate: 1.2%). We maintain Neutral on Axis REIT as near-term earnings outlook expected to be flattish. Meanwhile, dividend yield of Axis REIT estimated at 4.6%.

Source: MIDF Research - 19 Jan 2017