• 1HFY17 earnings in line

• Marginal earnings growth

• Acquiring industrial asset in Kuantan

• Earnings forecast for FY18 revised upwards

• Maintain NEUTRAL with a revised TP of RM1.73

1HFY17 earnings in line. Axis REIT 1HFY17 core net income of RM46.3m came in within expectations, at 50% and 47% of our and consensus full year estimates respectively. Second interim distribution per unit (DPU) of 2.17sen was declared.

Marginal earnings growth. Axis REIT 2QFY17 core net income climbed by a marginal 2.4%yoy to RM23.3m, mainly due to rental contribution from Scomi Facility in Rawang (acquired in November 2016) and stable rental contribution from other assets. That brings cumulative earnings in 1HFY17 to RM46.3m, increasing by 2.2%yoy. The flattish earnings growth was due to loss of income from Axis Eureka (disposed in March 2017) which cushioned by earnings contribution from Scomi Facility in Rawang.

Acquiring industrial asset in Kuantan. Axis REIT announced that it has entered into a sale and purchase agreement to acquire a pipecoating factory for RM155m. The asset is fully occupied and Axis REIT will lease back the asset to Wasco Coatings Malaysia Sdn Bhd on a fifteen years’ lease term. We are not entirely surprised by the acquisition as Axis REIT has announced earlier on that letter of offer for the acquisition of the asset has been accepted. We are positive on the asset acquisition, as the asset acquisition is yield accretive where net yield of 7% is greater than Islamic financing cost of ~4.3%. The asset is expected to lift FY18 earnings by 4%.

Earnings forecast for FY18 revised upwards. We maintain our earnings forecast for FY17. Meanwhile, we revise upwards our FY18 earnings by 4% to factor in earnings contribution from the asset acquisition. Overall, we estimate FY18 earnings to grow 16%yoy due to contribution from Nestle Distribution Centre, which is on schedule to complete by end 2017.

Maintain NEUTRAL with a revised TP of RM1.73. Corresponding to the upward revision in earnings and DPU, we revised our TP for Axis REIT to RM1.73 (previously: RM1.68). Our TP is based on Dividend Discount Model (Required rate of return: 7.3%, Perpetual growth rate: 1.2%). We maintain our Neutral recommendation on Axis REIT due to limited upside to our target price. Meanwhile, dividend yield of Axis REIT is estimated at 4.5%.

Source: MIDF Research - 25 Jul 2017