KIP REIT has proposed acquiring three industrial properties in Pulau Indah for an aggregate purchase price of RM78.7mn. This transaction marks KIP REIT's maiden acquisition of industrial assets. Although the acquisition cost is fair and the deal is consistent with KIP REIT's diversification strategy, we are neutral on this transaction, as it is expected to moderately dilute earnings in the initial years. No change to our forecasts pending the completion of the acquisition and the finalisation of the acquisition's financing structure, which is expected to be a combination of debt and equity. Maintain Buy with an unchanged TP of RM1.00 based on a target yield of 7% on CY23 DPU.

Acquiring Three Industrial Properties for RM78.7mn

KIP REIT has entered into a conditional sale and purchase agreements (SPAs) with Hextar Chemicals Sdn Bhd, Hextar Industrial Chemicals Sdn Bhd and Teju Logistics Sdn Bhd, respectively, for the sale and purchase of three industrial properties located in Pulau Indah for an aggregate purchase price of RM78.7mn. According to an independent market valuer, Henry Butcher Malaysia (Sel) Sdn Bhd, the total market value of these assets is RM78.9mn.

This transaction marks KIP REIT's maiden acquisition of industrial assets. According to the announcement, the proposed acquisition is expected to be completed in 2QCY23. Upon the completion of the proposed acquisition, approximately 350,000 sq ft of lettable area will be added to KIP REIT’s portfolio.

15 Years Lease Agreement

These properties will be leased to related companies of the Hextar group on a triple net basis for a fixed period of 15 years from the date of completion of the SPAs at a total initial annual rental of approximately RM5.1mn with built-in agreed rental escalations of 13% scheduled in Year 4, Year 7 and Year 11 (review every 3 years). The proposed acquisitions and leases are deemed related party transactions and will need the approval of KIP REIT's unitholders and shareholders of Hextar Global Bhd. Datuk Eddie Ong Choo Meng, the major shareholder of Hextar (65% stake), is also a major unitholder of KIP REIT (20% stake).

Reasonable Acquisition Cost

Based on the acquisition cost of RM78.7mn and NPI of RM5.1mn, the net yield of the assets works out to 6.5% for the initial term. Referring to the Bursa announcement, the net property yield is within the range of net rental yields of similar industrial properties based on comparable market data of between 6.0% and 7.4%. In addition, the rental escalation per term of 13% translates into an effective annual increment rate of 3.1%, which is within the range of effective annual increment rates for industrial properties based on concluded tenancy/lease agreements of between 3.0% and 3.2%. This information suggests that the acquisition cost is reasonable, in addition to the slight discount to the current market value.

It is Expected to be Yield-Dilutive over the Short Term

The proposed acquisition is in-line with KIP REIT’s new investment policy to invest in a comprehensive range of income-producing assets, diversify its revenue stream, and build a sector-diversified portfolio. While the acquisition yield of 6.5% during the first term is comparable to the market rate, it appears to be yield-dilutive if we compare it with KIP REIT’s FY21 property yield of 7%. Having said that, the fixed 13% rent increase every 3 years would increase net property yield to increase to 7.5%, 8.4% and 9.4% in Year 4, Year 7 and Year 11.

Impact

According to the announcement, KIP REIT intends to part-finance the acquisition via a private placement exercise. To recap, KIP REIT has proposed to undertake a private placement to raise up to approximately RM80.8mn, of which RM79.8mn is allocated for future yield accretive asset acquisitions. For illustration purposes, we estimate EPU dilution of 6-10% for FY23-24 on the following assumptions;

i) The acquisition will be fully funded via a private placement with an issue price of RM0.80/placement unit;

ii) The proposed private placement and industrial properties acquisition are to be completed in 1QFY23 (3QCY22) and 4QFY23 (2QCY23), respectively.

Nonetheless, the actual earnings dilution impact will be subject to the final financing structure as KIP REIT has the flexibility to borrow an additional RM220mn before reaching the statutory gearing cap of 50%.

We leave our earnings forecasts unchanged for now, pending the completion of the proposed acquisition and the finalisation of the debt/equity mix to fund the acquisition. Although the acquisition is consistent with KIP REIT’s diversification strategy, we are neutral on the deal, given it is expected to be moderately earnings dilutive in the initial years.

Valuation

We maintain our Buy recommendation on KIP REIT with an unchanged TP of RM1.00, based on a target yield of 7% to our CY23 DPU projection of 7.0sen/unit.

Source: TA Research - 13 Jul 2022