Axis REIT’s  9M14 results  were  below expectations,  at only 68%/65% of our/consensus estimates. Its 3Q14 earnings were affected by the loss of income from Axis Plaza as well as lower overall occupancy. We trim our FY14 estimate by 6.8%, as we expect  contributions  from  its new assetsto only start from FY15  onwards. Our DDM-based TP  slips  to  MYR3.55 (from MYR3.60), implying a 2.6% downside. Maintain NEUTRAL.

Below  expectations.  Axis  REIT’s  (Axis)  3Q14  core  net  profit  of MYR18.9m  (-9.0%  QoQ,  -11.4%  YoY)  brought  9M14  numbers  to MYR62.0m (-1.8%  YoY)  –  at 68%/65%  of our/consensus estimates  and falling below both expectations. The REIT announced a distribution per unit  (DPU)  of  5.0  sen  for  3QFY14,  which  includes  the  last  tranche  of special  DPU  of  0.76  sen  arising  from  Axis  Plaza’s  disposal.  It  also announced a revaluation gain of MYR20.9m this quarter.

Affected  by lower occupancy.  Its overall occupancy  rate saw a slight drop to 90.5% this quarter (2QFY14: 92.0%)  due to: i) some tenants  not renewing their leases; ii) the vacancy in Axis Business Campus owing to major  refurbishment  works.  Revenue  was  also  affected  by  the  loss  of income  from the disposal of  Axis Plaza.  Given the REIT’s  track record, we expect the vacancy problem to  be temporary, although  its  earnings growth could suffer in the near term. 

New acquisition updates. Axis’ management has indicated that all of its new acquisitions will only be completed towards end-December  (instead of its previous guidance of Oct 2014).  As such, we expect earnings  from the new assets to only contribute significantly from FY15 onwards.  We believe that Axis’  placement exercise will also be done concurrently with the completion of the new acquisitions.

Earnings forecast. We trim our FY14 earnings by 6.8% due to the lower occupancy rates and as we expect the earnings contribution from its new assets  to  only  start  from  FY15  onwards.  Nonetheless,  we  are maintaining our FY15/16 earnings estimates.

Maintain  NEUTRAL.  We  decrease  our  DDM-based  TP  slightly  to MYR3.55  (from  MYR3.60)  after  our  earnings  revision.  We  view  Axis’ aggressive  asset  acquisitions  in  recent  months  positively,  and  believe that more yield-accretive acquisitions could be in the cards going forward to further drive the REIT’s earnings growth.

Source: RHB