This article first appeared in The Edge Financial Daily, on March 7, 2016.

Axis Real Estate Investment Trust
(March 4, RM1.52)
Maintain hold call with an unchanged target price (TP) of RM1.60: We met with the management team of Axis Real Estate Investment Trust (Axis REIT) and left with slight optimism about the company. Financial year 2015 (FY15) gross revenue of RM165.68 million was translated into normalised net profit of RM94.2 million with distribution per unit of 8.4 sen (yield @ 5.4%).

Overall occupancy rate was healthy at 92%. Tenant retention rate and rental reversion were at 82% and 8% respectively. The vacant spaces translate into a potential DPU upside of two sen. The management shared that take-up rates improved in the fourth quarter of FY15. The management is also more optimistic going forward, and is improving the retention rate for the upcoming 27.6% of net lettable area expiry.

Apart from the ongoing acquisitions of logistics warehouse in Nusajaya and Pasir Gudang, upcoming potential acquisitions in various locations amount to about RM369 million. Growing the assets under management to reach RM3 billion by 2018 is on track. However, as the gearing is now close to the internal threshold of 35%, potential dilution may be on the cards. Consequently, future acquisitions will likely be funded mainly by placement of up to 20% new units, potentially raising more than RM320 million.

Its pre-delivery and inspection centre may need to be taken off the book given that development is not allowed under REIT guidelines to develop it into a mega distribution centre. While the potential injection of this centre could fetch as high as RM400 million, the earliest timeline would be in the second half of 2018. Whereas Axis Business Campus is expected to undergo refurbishment to become multi-tenanted property going  forward, with potential income of RM4 million to RM5 million per year.

The management shared that the strategy and vision are still largely intact with the stance as a long-term real estate investor prioritising capital value gain. The team is well-structured to run efficiently with little fuss post-transition of the management. Risks include the high concentration in logistic warehouse, office/industrial and manufacturing facilities, prolonged erosion in consumer sentiment, slower rental reversion  compared to other Malaysia REITs (M-REITS).

We like the uniqueness of the trust given its mixed exposure to industrial properties compared with other M-REITs. However, the highly specialised portfolio of industrial/manufacturing properties makes Axis REIT sensitive to adverse changes in industrial policy.

We maintain a “hold” call with an unchanged TP of RM1.60 based on a targeted yield of 5.7%. — Hong Leong Investment Bank Research, March 4