This article first appeared in The Edge Financial Daily on October 10, 2019

Axis Real Estate Investment Trust
(Oct 9, RM1.82)
Maintain buy with an unchanged target price (TP) of RM2.07: Axis Real Estate Investment Trust (REIT) is acquiring another asset within Kawasan Perindustrian Nilai II, Negeri Sembilan — this makes up a total of five acquisitions announced year to date.

We continue to like the REIT, given its defensive and stable earnings growth. Axis REIT is our sector top pick, with the highest total return within the industry under our coverage universe.

The REIT is looking to acquire an 8.751-acre (3.54ha) piece of leasehold land in Nilai from K-Plastics Industries for a total cash consideration of RM50 million.

The property, which has a total gross floor area of 246,500 sq ft, comprises a single-storey factory/warehouse with a double-storey office annexed to it, refuse collection centre, guard house, and Tenaga Nasional substation.

K-Plastics, the property’s existing tenant, is involved in the manufacture and sale of plastic and packaging products. It has a fixed leasing tenure of 10 years from the commencement date of the lease agreement, with an option to renew for another five years.

The total cash consideration for Axis REIT is RM50 million, while the property’s net book value stands at RM33.7 million as at end 2018. Monthly rental for the premises for the first three years is RM277,096 and will be RM304,805 for the following three years. Year seven to year nine of the lease tenure entails monthly rentals of RM335,286, with RM368,814 for year 10.

The acquisition will be fully funded via borrowings. We expect the proposed debt financing to cause Axis REIT’s gearing level to increase — standing at around 40% in financial year 2020 (FY20). As the gearing level is approaching the 50% limit prescribed by the Securities Commission Malaysia’s guidelines, we expect the REIT to carry out its placement exercise soon to pare down its gearing. With the additional rental income, we revise our earnings forecast by around 1%.

We are mildly positive about the acquisition, as the initial yield for the asset is slightly low — at only 6.7%. The yield will gradually increase as the step-up in rental rate kicks in from year three onwards. This acquisition is expected to be completed by end-2019, and should increase the number of properties owned by Axis REIT to 50 in 2020.

Following this acquisition, we revise our FY20 to FY21 earnings by around 1%. We keep our TP, as we also factored in a larger unit base — this is in anticipation of the placement exercise. We continue to like Axis REIT, given its defensive and stable earnings growth. The possibility of yet another rate cut in the next six months should be a positive to the sector, given the wider yield spreads of government bonds. — RHB Research Institute, Oct 9