INVESTMENT HIGHLIGHTS

• Buying industrial properties in Indahpura, Kulai, Johor

• Expect minimal earnings impact for FY18F and 0.8% for FY19F

• Gearing estimated to increase to 34.1%

• Maintain NEUTRAL unchanged TP of RM1.55

Buying industrial properties in Kulai, Johor for RM38.7m. The properties are two freehold single-storey detached factories with mezzanine office and other ancillary buildings within the gated and guarded i-Park industrial area. Property one, valued at RM31.5m, is adjacent to Axis-REIT’s existing properties, Beyonics i-Park Campus Blocks A, B, C and D, and hence forming a cluster of industrial assets. Property one sits on 1.8 ha of land with a lettable area of 132,706 sq ft. Meanwhile, property two which is valued at RM7.2m sits on a 0.49ha parcel with a lettable area of 33,448 sq ft. Both are currently used for manufacturing and warehousing.

Expect minimal earnings impact on FY18F and 0.8% for FY19F. Annual revenue of RM2.75m is expected from both assets. The tenancy lease for property one is up to June 2027 at the rate of RM1.40 per sq ft for from year one to three, RM1.60 per sq ft from year four to six and RM1.80 per sq ft for year seven to 10. Net yield before financing cost is estimated at 6.8% per year. Meanwhile, Property two has a lease until 2024 with rental rate at RM1.30 per sq ft. rental income for both properties are estimated at RM2.75m per year.

Slight positive on the acquisition. The properties are bought slightly below market value of RM40.0m collectively. As property one is adjacent to Axis REIT’s existing assets, this may be a long term positive for the REIT.

Gearing estimated to increase to 34.1%. The acquisition will be fully funded through debt.

Maintain NEUTRAL with unchanged TP of RM1.55 as we make no changes to our earnings assumption. 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. Our valuation method, which is based on the Dividend Discount Model (Required rate of return: 7.5%, Perpetual growth rate: 1.0%), is unchanged. Dividend yield for Axis is estimated at 5.2%.

Source: MIDF Research - 8 Jun 2018