INVESTMENT HIGHLIGHTS

• Proposed to buy Shah Alam industrial asset for RM87m

• Potential earnings impact of +10% in FY18F

• Positive on the acquisition

• Maintain BUY with an unchanged TP of RM1.57

Proposed to buy Shah Alam industrial asset for RM87m. Axis REIT has proposed to acquire a warehouse and manufacturing facility alongside 10.1 acres of land in Shah Alam Section 28. The net lettable area of the building on the land totals 254,233 sq ft. The building is currently used for warehousing and assembly of electrical goods while 22,449 sq ft of the land area is currently used as a car park. The freehold asset is purchased from Teraju Sinar Sdn Bhd and will be leased back to the vendor for 6 years upon completion of the acquisition, which is expected in 2HFY18.

Potential earnings impact of +2% in FY18F as Axis’ core net income is expected to increase to RM117m from RM115m assuming that the new property contribute four months of rental income. In an arrangement to ensure rental income visibility, the rental from year 1 to year 3 will be paid in advance upon commencement of the lease, which will be kept in the stakeholder’s account. At the end of year one, the lessee is expected to pay the advance rental payment for year 4, and until the end of year 3, the advance rental of year 6 shall be paid. On the other hand, Axis’ gearing level is expected to increase to 35.26% as the acquisition is expected to be fully-funded through debt.

Positive on the acquisition as we believe that the new asset is yield accretive to the REIT with a net yield of 7% vs financing cost of about 4.5%. Moreover, we like the arrangement of the three-year advance payment of rental, which provides income certainty for Axis. The acquisition price of RM87m is also below the net book value of RM92m.

Maintain BUY with an unchanged TP of RM1.57 as we make no changes to our earnings assumption pending completion of the deal. We also maintain our assumptions and valuation method, which is based on the Dividend Discount Model (Required rate of return: 7.5%, Perpetual growth rate: 1.0%). Dividend yield is estimated at 5.9%. We like Axis for its niche position in the resilient industrial segment and proactive expansion plans.

Source: MIDF Research - 24 Apr 2018