INVESTMENT HIGHLIGHTS

• To develop an aerospace manufacturing facility for RM73.2m

• Neutral on the greenfield project

• Asset to be earnings accretive from FY19F onwards

• Upgrade to BUY with an unchanged TP of RM1.73

To develop an aerospace manufacturing facility for RM73.2m. Axis REIT has entered in an agreement to develop and lease a manufacturing facility cum office for Upeca Aerotech Sdn Bhd with a development cost of RM73.2m. The project is slated for completion by 15 December 2018. Upon completion, the plant will be leased to Upeca for RM5.6m p.a. in the first 3 years with rental step up in later stages.

Neutral on the greenfield project as Axis REIT agreement with Upeca for a long-term lease, mitigates possible development risks. We also take comfort that Upeca is already Axis REIT’s existing tenant. The single storey plant will have a gross built-up area of about 179,000 sq ft. The plant will be built on a 7.02-acre parcel to be sub-leased from Malaysia Airport Holdings Bhd (MAHB) for RM19.9m and for 30 years (with renewal option of 19 years), which will be paid in full upon completion of the land lease agreement with MAHB. The land is part of the 716-acre proposed Malaysia International Aerospace Centre Technology Park at Jalan Lapangan Terbang Subang.

Expected asset yield of 7% for first 3 years. The indicative rental rate of the asset is RM2.60psf. Rental income from the asset is estimated at RM5.6m p.a. Upeca, a subsidiary of London-listed Senior Plc, will be leasing the manufacturing plant cum office for 20 years. Upeca will bear the additional total project cost by paying an additional RM0.01 psf for every RM300,000 exceeding the initial project budget of RM46.8m.

Asset to be earnings accretive from FY19F onwards. We estimate that the new asset will contribute about RM2.0m per year to Axis REIT’s NPI as we take into account of interest cost and annual rental income of the asset upon completion. We expect financing cost of RM0.99m to marginally impact our FY18F CNI forecast by less than 1%.

We maintain our earnings forecast pending completion of the agreement. Meanwhile we expect its net gearing to increase to 39.6% from 36.5% currently. However, we note that Axis REIT is in the midst of a placement exercise, which is expected to reduce its gearing.

Upgrade to BUY with an unchanged TP of RM1.73, aligning the percentage upside to the change of our stock recommendation percentage threshold. However, we make no changes to our assumptions as the earnings impact from this project will only start from FY19F onwards. Our valuation method is based on the Dividend Discount Model (Required rate of return: 7.3%, perpetual growth rate: 1.2%). Dividend yield is estimated at 4.7%.

Source: MIDF Research - 2 Nov 2017