This article first appeared in The Edge Financial Daily on October 25, 2017

Axis Real Estate Investment Trust
(Oct 24, RM1.57)
Maintain hold with a lower target price (TP) of RM1.66: Axis Real Estate Investment Trust’s (REIT) third quarter ended Sept 30, 2017 (3QFY17) reported revenue remained relatively flat year-on-year (y-o-y) at RM42 million, while core net profit dropped 1.4% y-o-y to RM22.7 million. 

On a cumulative basis, stripping out nine months (9M) of FY17 revaluation gains of RM9.9 million and losses on the disposal of Axis Eureka of RM400,000 that were recognised on the income statement, core net profit grew 1% y-o-y to RM69 million. This was below our and Bloomberg consensus expectations, accounting for only 71% and 72% of the respective full-year estimates.

9MFY17 revenue grew to RM126.3 million (+1.1% y-o-y), driven by additional contributions from the Scomi facility in Rawang (acquisition completed in November 2016), as well as a higher rental reversion rate (+5.9% y-o-y) across its other properties, which offset the loss of income from Axis PDI.

Although 9MFY17 net property income improved by 2% y-o-y, the group’s bottom line only recorded a 1% y-o-y growth to RM69 million as a result of higher financing cost (+2.8% y-o-y) due to additional financing facilities utilised to fund the new acquisition.

We are positive about the fact that the sale and purchase agreement (SPA) for an industrial facility in Gebeng, Pahang has been signed. We will include earnings contributions from this industrial facility once the acquisition is completed (targeted by 4QFY17), which could lift our FY18 to FY19 earnings forecasts by about 5%. 

Meanwhile, the group has accepted two letters of offer to acquire industrial facilities in Iskandar, Johor and Senawang, Negeri Sembilan for RM50 million and RM19 million respectively, with completion targeted for 4QFY17 and the first half of FY18.

3QFY17 distribution per unit (DPU) of two sen was declared, bringing its 9MFY17 DPU to 6.3 sen (+3% y-o-y). This lagged behind expectations, accounting for 70% of our full-year DPU estimate of nine sen. Taking into account lower occupancy rates for several properties (D21 Logistics Warehouse, Menara Axis and Axis Business Park) and lower rental reversion assumptions, we cut our FY17 to FY19 earnings per share forecasts by 2.9% to 3.8%. We lower our payout ratio assumption closer to the current level of 99.7% (versus 99.9% previously), reducing our FY17 to FY19 dividend per share forecasts by 5.1% to 5.5%.

We maintain “hold” with a lower dividend discount model-based TP of RM1.66. While we like the group’s appetite for continuous asset injections and property developments to drive DPU growth, the group’s pending placement exercise (first tranche expected to be completed in 4QFY17 and second tranche in 2QFY18) may be dilutive (estimated to be about 8%). Upside risks are further development of Phase 2 of Axis PDI, which should see earnings accretion, and more DPU-accretive asset acquisitions. Downside risks are non-renewals of expiring leases. — CIMB Research, Oct 24