Axis Real Estate Investment Trust (Aug 3, RM1.75)

Maintain add call with a higher target price (TP) of RM1.90: Axis Real Estate Investment Trust (Axis REIT) has proposed to acquire a 15.2-acre (6.15ha) piece of industrial land with an industrial complex in Rawang, Selangor, for a total cash consideration of RM42 million from Scomi Coach Sdn Bhd (SCBC). The property comprises two single-storey factory buildings and a three- and four-storey office annex, a single-storey pre-delivery inspection factory and a single-storey fibre glass factory.

We were not surprised by this development as the group had earlier announced that it had received a letter of offer for the assets back in April 2016. The property will be leased back to SCBC for a fixed long-term lease of 15 years, with a 10% step-up in rental rates (starting from RM281,000 per month) after every three years and a renewal option for another five-year term after the lease expires. The purchase price suggests gross acquisition yield of 8%, in line with the group’s target acquisition yield of 7% to 7.5%.

We are positive on the acquisition as it is yield-accretive in the long term. Nonetheless, we expect the earnings contribution to be marginal in the near term, and it is only expected to improve financial year 2017 forecast (FY17F) and FY18F by less than 1%. Axis REIT’s gearing level is expected to remain fairly unchanged at 0.35 times post acquisition as the assets are not sizeable. Note that the group may turn to carrying out placements for its future acquisitions as it has internally set a gearing limit of 0.35 times.

We also lower our risk-free rate assumption to 3.6% from 4%, given the recent cut in the overnight policy rate. Thus, our TP is lifted to RM1.90. Our “add” call is retained, and we continue to like the company’s commitment to continuously inject value-enhancing assets into its portfolio as one of its key growth strategies. The group is also primed to tap the rising popularity of e-commerce through its industrial portfolio exposure, which is about 21% of its net lettable area. — CIMB Equity Research, Aug 2

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This article first appeared in The Edge Financial Daily, on Aug 4, 2016. Subscribe to The Edge Financial Daily here.

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