INVESTMENT HIGHLIGHTS

• Stable rental reversion and improving occupancy rates for 2HFY18

• Steady earnings stream underpinned by newly-acquired assets

• Finance cost expected to increase to fund purchases

• Maintain NEUTRAL with an unchanged TP of RM1.55

Stable rental reversion and improving occupancy rates for 2HFY18. To-date, Axis recorded a positive rental reversion of 5% while occupancy rate improved to 94% from 91% in end-2017. Among others, occupancy rate is expected to improve for Axis Business Campus from 29% to 62% in the next quarter from new tenants secured. Meanwhile, the positive rental reversion is supported by periodical step up in rents.

Steady earnings stream underpinned by newly-acquired assets. Looking into 2HFY18, we expect full contribution from Phase 1 of Axis Mega Distribution Centre and the Section 28, Shah Alam factory (Axis Shah Alam DC 4). Both properties had started contribution in June. In 3QFY18, we expect the completion of the acquisition of the manufacturing facilities in Indahpura, Johor worth RM38.7m. The purchase of Senawang factory in Negeri Sembilan for RM18.5m is also slated for completion in 2HFY18. Axis is also evaluating potential acquisition targets worth a combined value of RM190m. The targeted handover of Axis Aerotech Centre at Subang to Upeca by December 15, 2018 is on track.

Finance cost expected to increase to fund purchases. The increase in Axis’ income is expected to be offset by higher financing costs to fund the acquisition of the new assets as well as the development of Axis Aerotech Centre. Management guided that it has sufficient funds to finance the acquisition in the pipeline for FY18 and any potential cash calls to fund future property purchase may only happen in FY19. Including purchase of the Indahpura and Senawang factory and the development of Axis Aerotech Centre, Axis’ gearing is expected to climb to ~39% from 36.5% as of end-June.

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 - 8 Aug 2018