RHB Research: Maintains ‘outperform’ rating on Axis REIT

Buys property in Port of Tanjung Pelepas

* Within expectations. Excluding unrealised gains of RM2.6m, Axis REIT reported RM11.7 million net profit in 1QFY2012/10 (+0.8% q-o-q and +12.4% y-o-y). This was within expectations, accounting for 23%-24% of our and consensus estimates. The 12.4% y-o-y earnings growth was mainly driven by contributions from its newly-acquired assets in FY2009 i.e. Axis Steel Centre, Bukit Raja Distribution Centre and Prai industrial buildings (which were completed on March 5, 2010). The company has proposed an interim dividend of 3.7 sen for 1Q2010, which was in line with our expectation. Meanwhile, the company’s gearing ratio increased from 0.34x (4Q2009) to 0.35x as at end-1Q2010 following the acquisition of Prai buildings.

* Buys office building and warehouse in Port of Tanjung Pelepas (PTP). The company has proposed to acquire an office building and warehouse in PTP for RM30 million. The buildings are currently fully occupied. It has a 10-year lease agreement (with fixed step-up rental) with Nippon Express S/B. We like the deal for two key reasons: a) it is a yield-accretive and earnings-enhancing acquisition as the properties fetch a triple net yield of 9.2% (vs. its trading yield of 8.2%) with an interest cost of 4%; and b) the purchase price of RM30 million is at a slight discount to market value of RM31 million, giving rise to a capital gain of RM0.5m (after deducting other acquisition costs). The properties are expected to boost our FY2010-12 earnings forecasts by 0.3%-8.1% assuming the acquisition will be completed by October 2010.

* Quattro West is close to secure 100% occupancy rate. The refurbishment works on Quattro West (formerly known as Nestle House) have been completed. Y-t-d, 84% of total space has been leased out and the company is still in talks with other prospective tenants for the remaining space. The building will open for business on July 1, 2010.

* Risks. The risks include: 1) non-renewal of tenancy after expiry; and 2)

unfavourable economic conditions.

* Forecasts. We are upgrading our FY2010-12 earnings forecasts by 0.4%-8.1% to factor in earlier-than-expected completion of the acquisition of industrial building in Seberang Prai (early March 10, instead of May 10 previously) as well as the new acquisition in PTP.

* Investment case. We benchmark Axis REIT at dividend yield of 7% (in line with the pre-crisis average yield of 6.5%-7%), arriving at an indicative fair value of RM2.35 (from RM2.34 after the earnings upgrade). Maintain “outperform”.