Axis REIT’s earnings crimped by higher expenses

Axis Real Estate Investment Trust (Jan 19, RM1.57)

Maintain buy with a target price of RM1.84: Axis Real Estate Investment Trust’s (Axis REIT) fourth quarter ended Dec 31, 2015 (4QFY15) core net profit of RM21.8 million, increased by 8.2% quarter-on-quarter and 12.6% year-on-year (y-o-y), brought FY15 net profit to RM91.5 million (+12.6% y-o-y), below our and consensus estimates at 88%/92% of the full-year numbers respectively.

FY15 revenue growth of 18% y-o-y was mainly underpinned by the contribution from its new asset acquisitions during the year, and this has more than offset the absence of income from Axis Business Park (pictured), which remains untenanted post-refurbishments.

That said, we note that higher financing and managerial expenses have led to a significant margin squeeze, with FY15 core net margin coming in at 55.9% (FY14: 58.5%).

A distribution per unit (DPU) of two sen was declared for 4QFY15, bringing total dividends to 8.4 sen for FY15, below our estimates. Note that FY15 DPU is lower than FY14 levels due to the absence of special dividends in FY15. 

We expected the management to address its growth prospects (organic and inorganic) and vacancies in some of its assets at its briefing later yesterday.

We believe that Axis REIT could still have some potential for inorganic growth going forward. It announced in November the proposed acquisition of four adjoining industrial properties in i-Park Industrial Park in Kulai, Johor. Given that the acquisition will be fully funded via debt, the acquisition could potentially be DPU-accretive upon completion.

We also note that there has been a change at the helm effective Jan 1, with Leong Kit May taking over the position of chief executive officer from Datuk George Stewart LaBrooy.

We are confident that Axis REIT would be in good hands under the new leadership, given that Leong has been with the trust since 2006 and has risen through the ranks, having held the positions of chief financial officer and chief operating officer previously.

We lower FY16 to FY17 forecast earnings by 4% after updating our FY15 numbers. — RHB Research Institute, Jan 19

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This article first appeared in The Edge Financial Daily, on Jan 20, 2016. Subscribe to The Edge Financial Daily here.