Axis REIT still has room for more acquisitions

Axis Real Estate Investment Trust (April 24, RM1.38) 

Maintain hold with a target price (TP) of RM1.33: Axis Real Estate Investment Trust (REIT) has proposed to acquire two pieces of land for a total lump sum cash consideration of RM87 million from Teraju Sinar Sdn Bhd (TSSB). Upon completion in second half of 2018, the properties shall be leased back to TSSB for a fixed period of six years, with an agreeable monthly rental of RM528,000 for the first three years and RM581,000 for the following three years. We maintain forecasts pending completion of the acquisitions. We maintain “hold” with an unchanged TP of RM1.33 based on unchanged targeted yield of 5.6%.

We are positive about the news as the proposed acquisitions are yield-accretive given the net yield of 7% (before Islamic financing cost) versus its current yield of 5.4%. The properties will be fully tenanted under long lease term under three years’ advance rental which further minimises the risk to Axis REIT. The acquisition price works out to be RM197 per sq ft, which is fair for freehold industrial space in Seksyen 28 Shah Alam. Notably, the acquisition price of RM87 million is lower than the book value of the properties at RM92 million.

Axis intends to utilise debt facility of approximately RM87 million from its existing credit lines. The proposed debt financing will increase Axis’ gearing ratio to 35.3% from 33.1% as at end of financial year 2017 (FY17). With a gearing level of 35.3%, which is below the gearing limit of 50%, we feel there is still room for more acquisitions.

We maintain our forecasts as we expect meaningful contributions to only kick in in FY19, pending completion of the acquisitions. — Hong Leong Investment Bank Research, April 24

This article first appeared in The Edge Financial Daily, on April 25, 2018.

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