Axis Real Estate Investment Trust
(Aug 5, RM3.45)
Maintain hold with a lower target price (TP) of RM3.50 from RM3.60: With the adjusted forecasts, our dividend discount model-derived TP is now RM3.50 (cost of equity: 7.3%; terminal growth: 1.25%). We maintain our “hold” recommendation as forward yields are still decent at 5.3%, and the acquisition efforts provide long-term growth potential.

Axis Real Estate Investment Trust (Axis REIT) revealed at its first half of 2015 briefing that lease renewals were going smoothly: For the 12.9% of net leasable area expiring in 2015, about 55% has been renewed at a positive average reversion rate of 7.8%.

Portfolio occupancy was also steady at 92.7% (first quarter of 2016: 92.6%). However, a critical takeaway was that Axis REIT had still not secured tenants for the newly refurbished Axis Business Campus (ABC) and Axis Business Park (Block C) (ABPC) assets.

Besides the challenging office space environment, the management also attributed the delay to its focus on securing quality tenants on longer-term contracts.

In line with the long-term target of RM3 billion assets under management, Axis REIT revealed another potential acquisition: a RM61 million electronics manufacturing facility in Indahpura, Johor.

The proposed deal is currently in the due diligence stage. Axis REIT had not revealed any details, but indications are that the Indahpura asset will yield over 7%, and thus, likely to be distribution per unit (DPU)-accretive.

Both assets are part of Axis

REIT’s near-term acquisition target of seven assets valued at RM270 million, so there will be five more acquisitions valued at RM163 million.

We deferred some replenishment assumptions, in particular for the ABC, ABPC, Menara Axis, Crystal Plaza and Axis Eureka assets. As a result, we trimmed DPU forecasts by 8.9%/5.2%/2.7% for financial year 2015 (FY15), FY16 and FY17. — Alliance DBS Research, Aug 5

This article first appeared in digitaledge Daily, on August 6, 2015.