Axis REIT’s 1Q realised net income within expectations

Axis Real Estate Investment Trust (April 26, RM1.38)

Maintain market perform with a target price of RM1.30: Axis Real Estate Investment Trust’s (REIT) realised net income (RNI) for first quarter of financial year 2018 (1QFY18) of RM23.7 million was within our (24%) and market’s (23%) expectations. 1QFY18 gross dividend per unit (GDPU) of 1.94 sen was also within expectations at 24%. We maintain core net profit estimates for FY18 and FY19 of RM99.6 million and RM110.1 million. FY18 and FY19 earnings growth will be driven by recent acquisitions and contributions from greenfield developments. A first interim dividend of 1.94 sen (which includes a 0.46 sen non-taxable portion) was declared. This was also within our expectations, making up 24% of our FY18 GDPU estimate of 8.10 sen, implying 5.9% gross yield.

On a year-on-year basis, top line was up by 6% on positive rental reversions and a higher occupancy of 93.7% (from 91.9% in 1QFY17), as well as increased rentals from new acquisitions Kerry Warehouse (competed in 3QFY17) and Wasco Facility (completed in 4QFY17). This allowed earnings before interest and taxes margin to improve by one percentage point despite higher operating cost (+4%) and expenditure (+19%). Additionally, financing cost increased by 9.2% on higher borrowings for recent acquisitions, resulting in RNI increasing by 3.9%. One a quarter-on-quarter basis, top line was up by 5.8% due to similar reasons mentioned above, which resulted in RNI increasing by 5.5% on flattish RNI margins. Note that there was a revaluation gain of RM7.4 million during the quarter.

FY18 and FY19 will see minimal leases expiring at 16.8% and 14.6%, respectively, of portfolio’s net lettable area. Axis REIT has a pending letter of offer to acquire an industrial facility in Senawang, Negeri Sembilan for RM18.5 million, and three industrial facilities in Indahpura, Johor for RM45.2 million. We have yet to take its earnings contributions into account as details are sketchy pending announcement of sale and purchase agreement. We believe the group will likely incur borrowings to fund these potential acquisitions. Growth in FY18 and FY19 is expected to be driven by the inclusion of Axis Mega Distribution Centre Phase 1 (previously known as Axis PDI Centre) and its second greenfield for Upeca Technologies Sdn Bhd in Subang. Our FY18 and FY19 GDPU estimates of 8.1 sen and 8.9 sen imply FY18 and FY19 gross yield/net yield estimates of 5.9%-6.5% and 5.3%-5.8%.

Our “market perform” call is premised on our neutral outlook for Axis REIT as the market has priced in most of the positives for FY18, with a gross yield of 5.9%, which is close to large-cap Malaysian REIT peers’ average of 6.2%. Axis REIT is highly institutionalised and one of the few syariah-compliant Malaysian REITs, which should offer some downside risk protection. — Kenanga Research, April 26

This article first appeared in The Edge Financial Daily, on April 27, 2018.

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