INVESTMENT HIGHLIGHTS

• RM200m worth of assets earmarked

• Placement to fund some of the assets is possible

• Improving occupancy rate is still a priority

• Maintain NEUTRAL with an unchanged TP of RM1.82

RM200m worth of assets earmarked. Axis REIT is looking to increase the number of assets under its portfolio from the existing 45 to 52 by end of the year. Recently, it has announced two new assets in Penang. Other developments include acceptance of letter of offer to acquire two manufacturing facilities in Nusajaya, Johor for RM55.8m, two manufacturing facilities for RM55.8m in Shah Alam and one manufacturing facility for RM60.0m in Kota Kinabalu, Sabah. It has also been successful in its bid to buy one manufacturing facility for RM50.0m in Nilai, Negeri Sembilan.

Placement to fund some of the assets is possible as its gearing level is likely to breach 40% if all the acquisitions of the RM200m worth of assets are completed by this year. Hence we do not rule out the possibility of a placement exercise to fund some of these acquisitions when the gearing level exceeds the 40% level. Based on our estimation, a placement of up to 10% of its total units would be sufficient to fund the acquisitions it has in the pipeline. The last time a placement took place was in the fourth quarter of 2017.

Improving occupancy rate is still a priority. Management emphasized the importance of improving occupancy rate for its assets that are not fully occupied. Occupancy rate has improved by 1ppt to 95% from 94% in the previous quarter. Properties with occupancy rate below 90% as at end-June are: Fonterra HQ (85%), Axis Business Park (82%), Wisma Academy Parcel (78%), Menara Axis (75%), Wisma Kemajuan (74%), Crystal Plaza (71%), Axis Business Campus (67%), The Annex (60%), Quattro West (50%) and Axis Technology Centre (48%). Among others, management expects occupancy rate at Menara Axis to reach 80% from 75% in Q3. Also, 47% of the 2.1m sq ft of the lease expiring this year has been renewed.

Maintain NEUTRAL with an unchanged TP of RM1.82. We make no changes to our earnings estimates and our Dividend Discount Modelderived TP for now. Our required rate of return is maintained at 7.5% while terminal growth rate of 1.6% is unchanged. Moreover, dividend yield for Axis is estimated at 5.0%. While we like Axis for its stable recurring income, we believe that most of the near-term positives have been priced in.

Source: MIDF Research - 26 Jul 2019