KEY INVESTMENT HIGHLIGHTS

• Buys Nilai plastic plant for RM50m

• Step up rate of 10% in every three years

• Slight positive on the acquisition as it is earnings accretive

• Maintain NEUTRAL with an adjusted TP of RM1.83 (previously RM1.82)
   

Buys Nilai plastic plant for RM50m. Axis REIT has entered into a sales and purchase agreement with K-Plastics Industries Sdn Bhd to buy a factory, warehouse cum office building in Nilai for RM50m. The land area of the asset is 8.74 acres while the gross floor area is 246,500 sq ft. It comes with a 99-year lease which expires on 19 August 2089. The warehouse and office for the manufacturing and sale of plastics and packaging products is about 4 years old.

Step up rate of 10% in every three years. The property will then be leased back to K-Plastic for 10 years from the commencement date of the lease agreement with an option to renew for another 5 years. Rental income per year for the property is RM3.3m with a step up rate of about 10% in every three years. At the 10th year of lease, annual rental income from this property is RM4.4m.

Slight positive on the acquisition as it is earnings accretive. Based on our estimates, the property will add 0.8%/0.7% to its CNI for FY20F/FY21F. On top of that, the purchase price of RM50.0m is lower than the market value of RM51.0m as appraised by independent valuer PPC International using the income approach and comparison approach. Meanwhile, Axis REIT’s gearing is expected to climb to 38.4% with this acquisition. We do not rule out a fund raising exercise in the near term as Axis’ gearing level creeps nearer to 40%. This in in view of its acquisition pipeline.

Maintain NEUTRAL with revised TP of RM1.83 (from RM1.82 previously). The revision of our TP is in-line with the assumption of new income stream from the new asset. As a result, our TP is raised to RM1.83 from RM1.82. Our required rate of return is maintained at 7.5%. Dividend yield for Axis is estimated at 5.1%. While we like Axis for its stable recurring income, we believe that the unit price upside is limited at this juncture.

Source: MIDF Research - 9 Oct 2019