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This article first appeared in The Edge Financial Daily, on November 13, 2015.

 

Axis Real Estate Investment Trust (REIT)
(Nov 12, RM1.62)

Maintain neutral with an adjusted target price (TP) of RM1.70: Axis Real Estate Investment Trust (Axis REIT) has proposed to acquire four single-storey detached factories, annexed with a two-storey office building in Kulai, Johor, from Axis AME IP Sdn Bhd (AAIP) for RM61 million.

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The industrial building currently is being leased to Beyonics Technology (Senai) Sdn Bhd for manufacturing plastic precision components, mould and electronic manufacturing services.

Note that this is a related-party transaction in which directors and shareholders of Axis REIT, namely, Datuk George Stewart LaBrooy, Tew Peng Hwee and Datuk Abas Carl Gunnar Abdullah, are having indirect interests in AAIP.

The acquisition is expected to be completed by the end of fourth quarter 2015.

Although the acquisition is expected to improve financial year 2016 (FY16) core net income by 1.7%, its gross yield of 7.9% is lower than an average gross yield of 10% for Axis REIT’s portfolio.

Note that the monthly rental income is RM400,000. The acquisition is in line with Axis REIT’s expansion strategy in the industrial assets segment. Upon completion of the acquisition, Axis REIT’s net lettable area will be expanded by 4% to 7.3 million sq ft.

Axis REIT intends to fund the acquisition by utilising the debt facility from its existing credit lines. We estimate that its gearing should increase to 34.2% (from 31.3% as of end-September).

We are not overly concern about the higher gearing as it is still below the limit of 50% prescribed by REIT guidelines.

We left our earnings forecast for FY15 and FY16 unchanged pending completion of the acquisition. Our TP is reduced slightly to RM1.70 due to housekeeping reasons. Our valuation method is based on a dividend discount model (required rate of return: 7.3%, perpetual growth rate: 2.1%). — MIDF Research, Nov 12

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