This article first appeared in The Edge Financial Daily on October 16, 2019

Axis Real Estate Investment Trust
(Oct 15, RM1.79)
Maintain outperform with an unchanged target price of RM2: Axis Real Estate Investment Trust (REIT) has proposed to acquire a single-storey warehouse-cum-office building in Pelabuhan Tanjung Pelepas (PTP), Johor for RM65 million from Johor Port Authority (JPA) and main lessee Pelabuhan Tanjung Pelepas Sdn Bhd which operates and manages PTP under licence by the JPA. The asset is currently 100% occupied with a 35-year five-month sub-lease term.

The asset will be occupied by Schenker Logistics (Malaysia) Sdn Bhd for an initial 10 years starting September 2018, with an option to renew for another five years. The acquisition will be funded by borrowings and is expected to be completed by the first half of calendar year 2020.

The asset has an 11% step-up rate in year six onwards, and an average gross yield of 7.4% in year one, and an 8.2% gross yield in year six, within more recent acquisitions’ gross yields of between 7.5% and 9%. We view this single acquisition as neutral given a minimal impact on earnings at less than 1% versus Axis REIT’s large portfolio with investment properties totalling almost RM3 billion.

We like Axis REIT continuously acquiring new industrial assets, providing long-term earnings and distribution per unit stability due to the nature of long-term leases for industrial assets; and operating in the most resilient segment versus other Malaysian REITs under our coverage — be it retail, office or hospitality.

The group is eyeing industrial assets totalling RM116 million in financial year 2019 (FY19) — one in Kota Kinabalu, Sabah and another in Shah Alam. We expect Axis REIT to undertake a placement towards end-FY19 or early FY20 after these acquisitions to pare down borrowings. We reckoned a 10% placement is more likely, to avoid overdilution, which would then lower FY20 gearing back to 0.39 times. — Kenanga Research, Oct 15