Axis REIT (Oct 26, RM1.74)

Maintain hold call with a lower target price (TP) of RM1.80: Axis REIT’s third quarter of financial year 2016 (3QFY16) reported revenue remained relatively flat year-on-year (y-o-y) at RM42 million, while core net profit dropped 9.7% y-o-y to RM22 million. This brought its cumulative reported net profit to RM96.2 million (+20.9% y-o-y). Stripping out nine-month financial year 2016 (9MFY2016) revaluation gains of RM29.3 million, core net earnings dipped 4.7% y-o-y to RM67 million. This was below our and market expectations, making up 68% and 71% of the respective full-year estimates.

Axis REIT’s 9MFY16 revenue increased marginally to RM125 million (+0.9% y-o-y), driven by additional contribution from Beyonics i-Park Campus, Johor, and better rental reversion rates across its other properties, which offset the loss of income from Axis PDI. Nonetheless, NPI growth was cancelled out by higher operating expenses (+15.1% y-o-y) due to one-off maintenance costs on a few of its properties. As a result, core earnings fell 4.7% y-o-y to RM67 million.

Axis REIT also announced that it had entered into a sales and purchase agreement with Malaysian Qualifications Agency to dispose of Axis Eureka for a total cash consideration of RM56.1 million. We are positive on this move, and the group’s active strategy of recycling its capital by disposing of underperforming assets in pursuit of higher-growth assets. We believe that the net proceeds from the disposal will be used to pare down borrowings, which should come down to around 0.32 times (from 0.34 times).

The group declared 3QFY16 distribution per unit (DPU) of 2.05 sen, bringing its total 9MFY16 DPU to 6.15 sen (-3.1% y-o-y). This was below our DPU forecast of 9.1 sen and represents 68% of the full-year estimate. Taking into account the higher operating expenses and lower occupancy rates for several properties, we cut our FY16 to FY18 estimates by 4.9% to 8.5%. While the group is expected to distribute net capital gains of RM1.2 million (or 0.11 sen/unit) from the disposal, this will have minimal impact on the group’s FY16 DPU.

We maintain our hold call with a lower dividend discount model-based TP of RM1.80. While we continue to like the group’s appetite for continuous asset injections and property developments to drive DPU growth, we note that yields have compressed to between 5.1% and 5.8% from 6% to 6.8%. Share price rerating catalysts include the further development of Phase 2 of its Axis PDI site, which should see earnings accretion comparable to Phase 1, and acquisitions of more DPU-positive industrial assets. — CIMB Research, Oct 25 

This article first appeared in The Edge Financial Daily, on Oct 27, 2016. Subscribe to The Edge Financial Daily here.

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