This article first appeared in The Edge Financial Daily on April 11, 2019
Axis Real Estate Investment Trust
(April 10, RM1.80)
Maintain buy call with an higher target price (TP) of RM2.04 (from RM1.90). We reiterate our “buy” recommendation on Axis Real Estate Investment Trust (REIT) with a higher dividend discount model (DDM)-derived TP of RM2.04 (from RM1.90) after incorporating earnings contributions from Axis Mega DC2 from earnings for the financial year 2021 estimate (FY2021E) given the management’s target to secure new tenant(s) by the end of 2019 and the robust demand for warehouse and or logistic assets, as well as a lower discount rate. At a 5.4% FY2019E yield, Axis REIT’s valuation looks attractive, in view of its sector-leading FY2019E earnings per unit (EPU) growth rate of 7.6%, solid assets occupancy, as well as the compression in Malaysian Government Securities (MGS) yield (Malaysian REITS [MREITs]) valuation is positive correlated to 10-year MGS prices).
Axis REIT is keen to develop Axis Mega Distribution Centre Phase 2 on the site located next to DC1. Based on the property info memo, Axis REIT plans to develop the site into a grade-A distribution centre with green mark qualification and a flexible modular space configuration. We are positive on the proposed development. Based on several assumptions, we forecast the project to lift Axis REIT’s FY2021E EPU by 4%
Axis REIT has the highest earnings sensitivity to overnight policy rate (OPR) changes, versus the other five MREITs under our coverage. Approximately 69% of its borrowings is based on floating rates, notably higher than peers’ 0-35%. We estimate that a 25-basis-point cut in the OPR will lift its full-year EPU by 1.5%. While we maintain our house view that Bank Negara Malaysia will maintain the OPR at 3.2% throughout 2019, we see a higher risk for a cut versus a hike.
We trimmed our FY2019-FY2020E EPU by 1.1% to 1.3% but lifted our FY2021E EPU by 2.7% after incorporating: i) the 2018A financial and operational details; ii) flat office rentals for FY2019-FY20E (from earlier forecasts of 2% to 3% growth); iii) a lower average finance cost of 4.45% (from 4.5%); and iv) earnings contributions from Axis Mega DC 2 starting FY2021E.
We raised our DDM-derived TP to RM2.04 (from RM1.90) after incorporating the earnings forecast revisions and a lower discount rate of 7.9% (from 8.2%). At a 5.4% FY2019E yield, Axis REIT’s valuation looks attractive, in view of its sector-leading FY2019E EPU growth rate of 7.6%, solid assets occupancy, as well as the compression in MGS yield — Affin Hwang Capital, April 10