Axis Real Estate Investment Trust (April 26, RM 1.62)

Maintain hold with a target price (TP) of RM1.65: Axis Real Estate Investment Trust (REIT) reported its first financial quarter ended March 31, 2016 (1QFY16) realised net profit of RM22.2 million (-1.5% year-on-year [y-o-y]). Annualised, this was below our expectations and consensus by 15% and 11% respectively, primarily due to the prolonged vacancy rate of 8%, which was above our expectation of 6.5%.

Rental income growth for 1QFY16 was +1.7% y-o-y, attributable to the slow take-up vacant net lettable area (NLA), which totalled approximately 560,000 sq ft or 8% of the total portfolio NLA of seven million sq ft. Otherwise, revenue has been driven by the expansion of Axis REIT’s portfolio, as well as recurring rental income. An interim distribution per unit (DPU) of 2.05 sen was proposed in 1QFY16 (1QFY15: 2.05 sen)

We are of the view that the rental market will remain challenging in 2016 given the pipeline of incoming supply in the market, while business sentiment still remains lacklustre. This may have a negative bearing on Axis REIT, given the upcoming renewal of 27.6% of its NLA (1.94 million sq ft), involving some key tenants at Menara Axis, Crystal Plaza, Wisma Kemajuan, Emerson Nilai and SPLC3.

New office supplies as well as potentially lower rental rates in suburban locations could spur a relocation of some tenants, which are also coping with lower business revenues. We are still maintaining 2016 to 2018 earnings forecasts as we believe that management is in the midst of getting tenants to fill up the vacant spaces.

We maintain our “hold” rating on Axis REIT at 12-month our dividend discount model-derived TP of RM1.65 (based on 8.2% cost of equity, 6% equity risk premium and 2% terminal growth rate). We currently forecast 2016 and 2017E (estimate) DPU gross yields at 6.1% to 6.5%.

Key risks are: i) oversupply of new office/industrial spaces; ii) higher debt refinancing rates; iii) negative rental reversion; and iv) rebound in business confidence. — Affin Hwang Capital, April 26

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This article first appeared in The Edge Financial Daily, on April 27, 2016. Subscribe to The Edge Financial Daily here.

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