INVESTMENT HIGHLIGHTS

• Developing a logistics warehouse in Penang for RM15.8m

• Gearing expected to increase to 37.6%

• Net yield estimated at 9% but earnings impact is minimal

• Maintain NEUTRAL with an unchanged TP of RM1.73

Axis REIT’s manager has proposed to undertake a RM15.8m logistics warehouse project in Batu Kawan, Penang. The land will be leased from Penang Development Corporation for 30 years, with a payment of RM3.9m. Construction cost of the facility is estimated at RM11.9m. Upon completion, estimated by 30 December 2019, the warehouse will be subleased to FedEx Malaysia for RM1.58m per year for the first seven years. This will subsequently be increased to RM1.74m per annum from year 8 to 10. FedEx will have the option to renew the lease for another five years after the initial term of 10 years.

Gearing expected to increase to 37.6% based on the total project cost of RM15.8m, which we deem as manageable. The REIT manager intends to fund the project through its existing credit facilities.

Net yield estimated at 9% but earnings impact is minimal. Based on our estimation, earnings impact from the lease of the courier facility to Axis REIT’s FY20F core net income is less than 1%. Nonetheless, we are confident that Axis REIT will be able to deliver the project within time and budget based on its track record from previous built-to-suit projects.

Maintain NEUTRAL with unchanged TP of RM1.73. We make no changes to our earnings assumptions and our valuation method, which is based on the Dividend Discount Model (Required rate of return: 7.5%, Perpetual growth rate: 1.6%), at this juncture. Dividend yield for Axis is estimated at 4.9%. While we like Axis REIT for it stable recurring income, we believe that upside is limited for the time being.

Source: MIDF Research - 16 Jul 2019