INVESTMENT HIGHLIGHTS

• Buys Bayan Lepas factory for RM20.5m

• Gearing expected to increase slightly to 37.7%

• Earnings contribution estimated at less than 1%

• Maintain NEUTRAL with an unchanged TP of RM1.73

Buys Bayan Lepas factory for RM20.5m. Axis REIT has announced that it entered into a sale and purchase agreement to buy a purposebuilt double-storey factory and office for RM20.5m. The land area of the property measures at about 90,040 sq ft with a gross floor area of 78,024 sq ft. The lease of the land will expire on September 9, 2051. The factory will be leased to Pentex Medical (Penang) Sdn Bhd, a medical diagnostic preparation manufacturer. The current rental rate of RM1.64m per year is subject to review in 2020.

Gearing expected to increase slightly to 37.7% from 37.6% following the proposal to develop a logistics warehouse for FedEx Penang on Monday. We believe that the estimated gearing level at under 40% is still manageable.

Earnings contribution estimated at less than 1%. The purchase does not come as a surprise as Axis has earmarked this property as one of their potential purchases this year. We think that the transaction is fair as the purchase consideration of RM20.5m is lower than both the RM20.9m market value appraised by an independent valuer as well as the net book value of RM22.6m. We estimate that earnings contribution from this asset to Axis’ FY20F core net income to be at less than 1%.

Maintain NEUTRAL with an unchanged TP of RM1.73. We make no changes to our earnings assumptions and valuation method, which is based on the Dividend Discount Model (required rate of return: 7.5%, perpetual growth rate: 1.6%), for now. Dividend yield is expected at 4.9%. We like Axis REIT for the stable rental income but we believe there is a limited upside in its unit price in the near-term.

Source: MIDF Research - 18 Jul 2019