This article first appeared in The Edge Financial Daily on October 24, 2018

Axis Real Estate Investment Trust
(Oct 23, RM1.51)
Maintain hold with an unchanged target price (TP) of RM1.49: The first nine months of financial year 2018 (9MFY18) results were in line: core net profit (CNP) up 12.5%; the first nine months of 2018 (9M18) distribution per unit (DPU): 6.3 sen; and 9MFY18 CNP was in line, at 74% to 75% of our and Bloomberg consensus full-year estimates. Revenue grew 14.5% year-on-year (y-o-y), on the back of a new stream of rental revenue from Nestle at Axis Mega DC and the four properties it acquired year to date (YTD). The 12.5% y-o-y growth in CNP could have been higher if not for a 25% rise in finance cost incurred to fund the acquisitions. Overall, 9M18 numbers show no surprises. Axis Real Estate Investment Trust (Axis REIT) declared a 2.35 sen DPU for the third quarter of 2018 (3Q18), bringing YTD DPU to 6.3 sen, in line with our expectations.

In 3Q18, Axis REIT completed the acquisition of Indahpura facility 1 and Beyonics i-Park Campus Block E (total cost: RM38.7 million). This added 166,000 sq ft to its portfolio and contributed a combined additional monthly rental revenue of RM230,000 from Aug 9. The two new assets bumped up Axis REIT’s property portfolio size from 42 as at end-2Q18 to 44, and raised the total value of its investment assets to RM2.7 billion (+2.3% quarter-on-quarter [q-o-q]). The RM18.5 million acquisition of an industrial facility in Senawang is pending completion.

Portfolio indicators were slightly up q-o-q in 3Q18. Rental reversion chalked up a decent 6% (end-2Q18: 5%) on the back of the total occupancy rate of 94.8% as at end-3Q18 (end-2Q18: 94%). Nine of its 44 properties registered occupancy rates of below 90%, the lowest being Quattro West which booked a net rental yield of 3.9% versus total portfolio net rental yield of 8.2% as at end-3Q18. Crystal Plaza, FCI Sentral and Strateq Data Centre are Axis REIT’s top three best-performing assets, registering net rental yield of 12.5% to 13.7%.

YTD, Axis REIT has renewed 73.1% of the 1.4 million sq ft of net lettable area (NLA) due for renewal in 2018. Based on end-3Q18 lease expiry profile, 15.1% of its total NLA or 1.4 million sq ft will expire in 2018; another 21% or 1.9 million sq ft of NLA will expire in 2019.

We make no revisions to our FY18 to FY20 earnings per share, and dividend discount model-based TP of RM1.49, based on cost of equity of 8% and TG of 1.5%. This is supported by FY18 to FY20 dividend yields of 5.9% to 6.2%. We retain our “hold” call due to a limited share price upside but are positive in the longer term, backed by Axis REIT’s strategy of continuous asset injections and property developments in the industrial space. More asset acquisitions are an upside risk to our call. A downside risk: Weak portfolio rental reversions. — CGSCIMB Research, Oct 22