Axis  REIT  recorded  a  9M13  net  profit  of  MYR63.1m,  up  5.2%  y-o-y.  Earnings  growth  was  driven  by  rental  reversions  from  existing  assets and  incremental  contributions  from  new  ones.  Going  into  4Q13, inorganic  growth  is  still  lacking.  Meanwhile,  the  macroeconomic environment remains unfavourable, as bond yields continue to hover at 3.6-3.7%. We maintain our SELL call, with an unchanged MYR3.24 FV.

- In  line.  Axis  REIT’s  MYR21.3m  3Q13  core  net  profit  (+10.4%  y-o-y; +0.5% q-o-q) boosted 9M13 net profit to MYR63.1m, up 5.2% y-o-y. The REIT  announced  a  distribution  per  unit  (DPU)  of  4.7  sen,  bringing  total YTD  DPU  to  13.8  sen  (+6.2%  y-o-y).  Revenue  growth  continues  to  be driven  by:  i)  positive  rental  reversions  from  existing  assets,  and  ii) incremental  contributions  from  new  assets.  Axis  REIT  also  recorded  a total revaluation gain of MYR14.6m from the revaluation of eight assets in 3Q13.

- Focusing  on  organic  growth.  News  on  the  acquisition  front  remains dry. Nonetheless, Axis REIT’s balance sheet remains healthy, with about MYR245m  of  debt  headroom  available  for  future  acquisitions.  On  the organic  front,  it  achieved  positive  rental  reversion  of  8.11%  for  the 372,000 sqf of NLA renewed. Occupancy is stable at 94.7%. The major refurbishment of Axis Business Campus is expected to be completed by end-Oct,  which  we  have  yet  to  factor  into  FY14  earnings.  Axis  REIT  is also  planning  to  do  major  repositioning  for  at  least  two  more  assets  to fully unlock their values.

- Proactive  capital  management.  Given  the  inevitable  interest  rate  hike over the longer-term, Axis REIT has taken the opportunity to lock in the current low interest rates through the issuance of a MYR155m sukuk on 15 Aug. Its current cost of debt now stands at 4.35%, still in line with the average cost of debt of 4-5% of its peers.

- Maintain SELL. We maintain our forecasts, SELL call and MYR3.24 FV, due  to  the  lack  of  re-rating  catalysts.  Valuations  remain  lofty  for  Axis REIT  at  1.56x  P/NAV  vs  the  sector  average  of  1.09x.  Although  its dividend  yield  is  above  the  current  10-year  Malaysian  Government Securities  (MGS)  bond  yield  of  3.6-3.7%,  uncertainties  surrounding  the timing  of  the  quantitative  easing  (QE)  tapering  is  negative  to  the  REIT sector, as dividend yields for REITs will get less appealing.

Source: RHB