KEY INVESTMENT HIGHLIGHTS

• Higher property expenses in FY19

• Healthy rental reversion

• On acquisition trail to expand portfolio

• Earnings forecast revised downwards

• Maintain Neutral with a lower TP of RM1.73

Higher property expenses in FY19. We came away from Axis REIT’s analyst briefing feeling ‘neutral’ on its earnings prospect. To recap, Axis REIT FY19 core net income missed expectations due to higher than expected property expenses. Note that Axis REIT completed a few AEI in FY19 namely building façade improvement works at Menara Axis and enhancement of sewer at Seberang Prai Logistic Warehouse 3. Higher property expenses were also due to expenses for three newly acquired assets in FY19.

Healthy rental reversion. Axis REIT recorded positive rental reversion of 2% in FY19. Meanwhile, Axis REIT registered take-up rate of 96% on spaces expiring in FY19 which we think was mainly underpinned by healthy demand for industrial assets. On the other hand, Axis REIT committed to build-to-suit development for FedEx with NLA of 44,000 sq ft in Batu Kawan, Penang. The development project has obtained its Certificate of Practical Completion on 30 December 2019 and is targeted to handover by February 2020.

On acquisition trail. Axis REIT remains on an acquisition trail to expand its portfolio. Acquisition targets includes Grade A logistics facilities and manufacturing facilities, retail warehousing in locations ideal for last-mile distribution, and industrial assets with potential for future enhancement. Total estimated value of acquisition targets is RM135m.

Maintain Neutral with a lower TP of RM1.73. We revise downwards our FY20/21F earnings forecast by 2.5% as we assume higher property expenses. Correspondingly, we revise downward our TP for Axis REIT to RM1.73 from RM1.75. Our TP is based on Dividend Discount Model (Required rate of return: 7.5%). We maintain our Neutral recommendation on Axis REIT due to limited upside for unit price.

Source: MIDF Research - 22 Jan 2020