INVESTMENT HIGHLIGHTS

• 1QFY18 earnings missed expectations

• Earnings up by +4% yoy as revenue increase by +6%

• Potential new assets that could boost mid-term growth

• Maintain BUY with an adjusted TP of RM1.54 (from RM1.57)

1QFY18 earnings missed expectations as its core net income (CNI) of RM24.1m makes up 21% of our full year estimates but broadly within consensus’ at 23%. A gross DPU of 1.94sen was announced for the quarter, which is also slightly below our expectation.

Earnings up by +4% yoy as revenue increase by +6%. This is attributed to rental proceeds from the newly purchased assets, namely: Kerry Warehouse and the Wasco facility at Kuantan; as well as positive rental reversions of its portfolio. However, CNI did not increase as much due to higher property expenses (+3.9% yoy), non-property expenses (+19.3%) and higher borrowing costs (+9.2%).

Fine tune our assumptions and revise earnings forecast.

Following the lower than expected results, we fine tune our occupancy rate and rental reversion for some of the properties under Axis REIT’s 41-asset portfolio. Subsequently, we reduce our FY18F/FY19F revenue by -2%/-4.2% to RM192m/RM207m. As a result, our FY18F/FY19F earnings are also lowered by -5.2%/-6.9% to RM109m/RM121m respectively. That said, we expect 2HFY18 to be stronger because of the contribution from the Axis Mega Distribution Centre.

Potential new assets that could boost mid-term growth. Besides the new RM87m property in Seksyen 28, Shah Alam that was announced on Monday, Axis REIT may see the addition of new assets including the Senawang factory in Negeri Sembilan that comes with a price tag of RM18.5m and manufacturing facilities in Indahpura, Johor worth RM38.7m in 2HFY18. We have not factored in contributions from these acquisitions. Besides that, it is evaluating potential acquisition targets worth a combined value of RM180m. It also targets to hand over the Axis Aerotech Centre at Subang, which is currently under development, to Upeca on 15 Dec, 18.

Maintain BUY with an adjusted TP of RM1.54 (from RM1.57) following the revision of our earnings estimates. However, we have kept our valuation method, which is based on the Dividend Discount Model (Required rate of return: 7.5%, Perpetual growth rate: 1.0%), unchanged. Dividend yield for Axis is estimated at 5.6%. We like Axis for its niche position in the resilient industrial segment and proactive expansion plans.

Source: MIDF Research - 26 Apr 2018