Axis REIT (AXRB) revealed at its recent results briefing, that it plans to grow  earnings  through  organic  as  well  as  inorganic  means. Nonetheless,  we  are  still  of  the  view  that  there  will  be  limited  upside surprises in 2H2013. We find the stock’s current valuation rather lofty at 1.58x P/NAV vs the MREIT sector average of 1.11x.  Maintain SELL and MYR3.24 FV.

- Same growth plans? During the briefing, the AXRB reiterated plans to acquire  the  same  pipeline  assets  that  it  has  been  looking  at  since  last year. Note that the REIT’s acquisition activities have been quiet so far. It is  currently  in  negotiations  to  acquire  two  warehouse  assets  in  Shah Alam with projected net yields of 7%-8%. Management expects to inject these  assets  by  year-end  or  early  2014.  It  is  also  negotiating  to  buy some small industrial assets.  

- Opportunities  for  organic  expansion.  Given  the  scarcity  of  quality assets  available  for  acquisition,  the  REIT  is  now  seeking  to  grow revenue  via  asset  enhancement  initiatives  (AEI)  to  unlock the  full  value of  its  assets.  A  major  AEI  in  progress  is  the  refurbishment  of  Axis Business  Campus,  due  for  completion  by  end-2014.  AXRB  is  confident that  it  would  be  able  to  command  a  higher  average  rental  exceeding MYR3.00 per sq ft (psf) post-refurbishment versus the pre-refurbishment average  of  MYR1.38.  It  is  also  looking  to  dispose  of  assets  that  are already fully valued and for which growth is limited. 

- Capital management. AXRB again indicated that it is likely to place out some shares this year, and this should coincide with new acquisitions to minimise any potential dilution. Note that at its current gearing of 32.6%, the  REIT  still  has  headroom  to  take  on  MYR270m  of  debt  before breaching  the  Securities  Commission  mandated  50%  limit.  AXRB  has also taken steps to insulate itself against rising bond yields. Next month, it  will  be  issuing  a  MYR155m  fixed  rate  sukuk  that  will  act  as  a  hedge against rising interest rates.

- Maintain SELL. No changes to our forecasts and recommendations. We maintain  our  SELL  call  and  MYR3.24  FV.  We  believe  that  AXRB’s current  valuation  is  rich  at  1.58x  P/NAV  vs  the  sector’s  average  1.11x. We hold on to our view that the trend of rising bond yields is detrimental to the REIT sector.

Source: RHB