• Slightly higher earnings in 1H17

• Lower portfolio occupancy rates

• Positive rental reversion

• Maintain NEUTRAL with unchanged TP of RM1.73

Slightly higher earnings in 1H17. We attended results briefing of Axis REIT and came away feeling neutral on the company. To recap, Axis REIT 1HFY17 core net income climbed 2.2%yoy to RM46.3m, mainly due to earnings contribution from Scomi Facility in Rawang (acquired in November 2016) which cushioned loss of income from Axis Eureka (disposed in March 2017).

Lower portfolio occupancy rates. Axis REIT recorded slight drop in portfolio occupancy rates where portfolio occupancy rates dropped to 89% as at end June 2017 from 91.86% as at end March 2017. The slight drop in occupancy rates was due to decline in occupancy rate in Quattro West (from 74% to 50%) while BMW Centre PTP has been left vacant due to lease expiry. Going forward, Axis REIT is looking for prospective tenants for BMW Centre PTP and Delfi Warehouse as well as improves occupancy rates of Axis Business Campus. On another note, construction of Nestle Distribution Centre is on track for completion by end of 2017 which will add net lettable area of 515k sf.

Positive rental reversion. Axis REIT recorded positive rental reversion of +5.94% in 1HFY17 where rental rate growth was mainly from its industrial assets. On lease expiry profile, 1.3m square feet of area is up for renewal in 2017 while close to 1m square feet has been locked in through tenancy renewals as well as new tenancies.

Maintain Neutral with unchanged TP of RM1.73. We maintain our earnings forecast for FY17/18. 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 is estimated at 4.6%.

Source: MIDF Research - 26 Jul 2017