INVESTMENT HIGHLIGHTS

• The Shah Alam Section 28 factory purchase is completed

• Expect earnings impact of+2.8%/+1.7% in FY18F/FY19F

• Full year gearing estimated at 38%

• Downgrade to NEUTRAL from BUY with an adjusted TP of RM1.55 (from RM1.54)

The Shah Alam Section 28 factory purchase is completed. The announcement of the RM87m acquisition was made in April and has been completed yesterday. Recall that 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 property will then be leased back to Teraju Sinar Sdn Bhd for six years with an arrangement of an advance payment to be held through the stakeholder’s account. Rental will increase by 10% from year four.

Expect earnings impact of+2.8%/+1.7% in FY18F/FY19F. We expect for the asset to contribute about RM3.2m to FY18F revenue and RM6.3m to FY19F revenue from the leaseback. Core earnings are estimated to increase to RM112m/RM123m for FY18F/FY19F respectively.

Full year gearing estimated at 38%. The RM87m acquisition is funded fully through debt and we expect that its full year gearing may come to 38%, which is still below the 50% requirement. Other potential acquisition in the pipeline include: the Senawang factory in Negeri Sembilan that comes with a price tag of RM18.5m and manufacturing facilities in Indahpura, Johor worth RM38.7m.

Downgrade to NEUTRAL from BUY with an adjusted TP of RM1.55 (from RM1.54). While we like the resilience of industrial properties, we believe that Axis’ near-term prospects have been priced in following the ~20% increase in unit price since April. The new TP of RM1.55 is adjusted 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 5.2%.

Source: MIDF Research - 5 Jun 2018