Injecting asset; more in the pipeline

Acquisition-led growth. Axis REIT (AXRB)’s 1Q2010 realised net income of RM12 million (+12% y-o-y, +1% q-o-q) was within expectations. Separately, it proposed to acquire a RM30.5 million logistic warehouse in Johor, with a net property yield of 9.2%. The acquisition is yield accretive. We expect a proposed placement of new AXRB units to support share price performance. Maintain “buy” with a DCF-based TP of RM2.28 (7.1% WACC) for its high dividend yield of >7.8% gross p.a.

EPU dilution in 1Q2010. Key takeaways from 1Q2010 results: (i) Stronger revenue of RM20 million (+14% y-o-y, +2% q-o-q) was due to full-quarter contributions from 2 industrial/warehouse properties acquired in 4Q2009 and additional two warehouses in end-1Q2010; (ii) On a y-o-y basis, EPU diluted by 6% (but +1% q-o-q), arising from the 51 million new units placement in 3Q2009. However, we expect sequential EPU to rise on the two recently-completed acquisitions and rental contributions from Quattro

West (formerly Nestle House) by July 2010; (iii) A DPU of 3.7sen (-5% y-o-y, -1% q-o q) was declared (95% payout, 1.9% yield) which will go ex- on April 30.

Yield accretive acquisition. AXRB proposed to acquire a logistic warehouse (namely PTP D8, in Johor) for RM30.5 million (3% discount to market value of RM31 million), raising AUM and NLA to RM989 million (+3%) and 4.2 million sq ft (+5%). The property is leased to Nippon Express for 10+3 years (since Nov ‘08), with triple-net yields of 9.2%. The acquisition will be debt funded (at interest cost of 4%) and is expected to complete by October 2010. We estimate 1%-3% upside to our 2010-11 EPU forecasts. However, we maintain our forecasts at this juncture.

Positive on near-term placement. Post-PTP D8 acquisition, AXRB’s gearing will increase to 37% (35% currently). While it is still comfortably below the statutory limit of 50%, AXRB plans to place out 69 million new units (raising est. RM133 million cash) by July 2010 to fund more acquisitions. The manager has identified seven potential assets (worth a total of RM450 million) for near-term injection. We are positive on the imminent placement as its current share price is at a 10% premium to its NAV. Also, the placement will provide the much needed liquidity in the stock.