AXREIT is acquiring an industrial-cum-office facility in Pelabuhan Tanjung Pelepas, Johor for RM65.0m. We are neutral on the asset acquisition due to minimal impact to earnings. We favour the long lease terms on decent gross yield of 7.4%. BUY with TP of RM2.00. on an unchanged +1.4ppt spread to our 10-year MGS target of 3.40%. Our applied spread is on the lower end among MREITs under our coverage (+1.3ppt to +3.2ppt). Additionally, AXREIT is one of the few Shariah-compliant MREITs, making it a favourite among institutional investors. At current level, gross yield of 5.4% is close to MREITs’ average of 5.5%.

AXREIT has proposed to acquire a single-storey warehousecum-office building in Pelabuhan Tanjung Pelepas (PTP), Johor for RM65m from Johor Port Authority (JPA) and main lessee Pelabuhan Tanjung Pelepas Sdn. Bhd which operates and manages Pelabuhan Tanjung Pelepas under a licence by the JPA. The asset is currently 100% occupied with a 35- year 5-month sub-lease term. The asset will be occupied by Schenker Logistics (Malaysia) Sdn Bhd for the initial period of 10 years (starting September 2018), with an option to renew for another 5 years. The acquisition will be funded by borrowings and is expected to be completed by 1HCY20.

The asset has an 11% step-up rate in year 6 onwards, and an average gross yield of 7.4% in year 1, and 8.2% gross yield in year 6, which is within the range of more recent acquisitions’ gross yields of between 7.5% and 9.0%. We view this single acquisition as neutral given the minimal impact to earnings of <1% vs. AXREIT’s large portfolio with investment properties totalling close to RM3b.

The Group is eyeing industrial assets totalling RM116m in FY19, one in Kota Kinabalu, Sabah and another in Shah Alam. We expect AXREIT to undertake a placement towards end FY19 or early FY20 post these acquisitions to pare down borrowings and reckon a 10% placement is more likely (to avoid over dilution), which would then lower FY20E gearing back to 0.39x.

Source: Rakuten Research - 15 Oct 2019