INVESTMENT HIGHLIGHTS

• CNI for 1HFY18 within expectations

• 1HFY18 earnings up by +10% yoy as revenue increase by +10%

• Pipeline of potential new assets to sustain mid-term growth

• Maintain NEUTRAL with an unchanged TP of RM1.55

CNI for 1HFY18 within expectations as its core net income (CNI) of RM50.9m makes up 45.5% of ours and 48.4% of consensus’ full year estimates. A gross DPU of 2.00 sen was announced for the quarter, which is broadly within expectation.

1HFY18 earnings up by +10% yoy as revenue increase by +10% to RM50.9m and RM92.5m respectively. 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. Meanwhile, Axis’ property expenses (+10.3%), non-property expenses (+37.5%) and borrowing costs (+19.7%) are higher yoy.

2QFY18 CNI rose +12%qoq to RM26.9m on the back of revenue that increased by 5% to RM47.5m. This is mainly due to higher non property expenses in the previous corresponding quarter.

Pipeline of potential new assets to sustain mid-term growth. During 1HFY18, Axis has also completed the acquisition of the Section 28, Shah Alam factory worth RM87m. Earlier in the year, it has also handed over the Phase 1 of Axis Mega Distribution Centre to Nestle Products Sdn Bhd earlier. Going forward, 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 in December this year .

Maintain NEUTRAL with an unchanged TP of RM1.55 as we make no changes to our full year estimates while we keep our valuation method, which is based on the Dividend Discount Model (Required rate of return: 7.5%, Perpetual growth rate: 1.0%). Dividend yield for Axis is estimated at 5.4%. We are neutral on the Axis at this point as we expect higher borrowing cost and expenses to offset the higher income from new assets.

Source: MIDF Research - 7 Aug 2018