Stronger quarters ahead expected for Axis REIT

Axis Real Estate Investment Trust (Aug 5, RM1.80)

Maintain market perform with an unchanged target price (TP) of RM1.76: Axis Real Estate Investment Trust’s (REIT) first half ended June 30, 2016 (1HFY16) realised net income of RM44.6 million met the consensus expectation at 46% and came in broadly within ours at 44%, as we expect stronger quarters ahead from new asset contributions. We reiterate our “market perform” call with an unchanged TP of RM1.76, based on a target gross yield of 5.6%, on a two-percentage-point (ppt) yield spread to our 10-year Malaysian Government Securities (MGS) target of 3.6%.

By the end of FY16, we expect four full quarters of contribution from Beyonics i-Park Blocks A, B, C and D, and a full-quarter contribution from the warehouse facility in Pasir Gudang. Distribution-wise, an interim dividend of 2.05 sen was declared (which includes a 0.07 sen non-taxable portion). Similarly, 1HFY16 gross distribution per unit (GDPU) was also broadly in line with our expectations, as it made up 44% of our FY16 GDPU forecast of 9.29 sen (5.2% yield).

Pending details in last Friday’s briefing, we believe the group will continue its asset acquisition of up to RM242 million of industrial assets, as per management’s initial guidance in its first quarter ended March 31, 2016 results. Year to date, Axis REIT has completed the acquisition of four industrial properties, namely Beyonics i-Park Blocks A, B, C and D (RM61 million), and two industrial assets, which are a warehouse facility located in Pasir Gudang, Johor (RM33 million), and an industrial complex in Rawang, Selangor (RM42 million). Note that we make no changes to our earnings forecasts of RM102 million to RM108 million for FY16 to FY17.

Our TP of RM1.76 is based on a target gross yield of 5.6%, on a two-ppt yield spread to our 10-year MGS target of 3.6%. Our “market perform” call is premised on the fact that we see no convincing near-term catalysts for the stock, and we believe any foreseeable downside risks have been accounted for. Meanwhile, the group is lacking strong distribution per unit (DPU)-accretive catalysts as recent acquisitions have been mainly neutral to mildly positive for its DPU, which is less than 5%.

More exciting catalysts for its DPU are needed to rerate the stock. That said, Axis REIT is highly institutionalised and is also one of the very few syariah-compliant REITs, which we believe will help offer some downside risk protection. Downside risks to our call include bond-yield expansion against our target 10-year MGS yield and weakening rental income. — Kenanga Research, Aug 5

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This article first appeared in The Edge Financial Daily, on Aug 8, 2016. Subscribe to The Edge Financial Daily here.