Axis REIT - 120329 - 2Q12 Top Buy

Axis REIT (AXREIT) is our 2Q12 Top OUTPERFORM pick as we reiterate our OUTPERFORM with an unchanged TP of RM2.82, based on GGM (8.2% required rate of return, 2.5% terminal growth and FY12E NDPU of 16.1sen). Overall, we are  not worried about the office and industrial segment as occupancy levels of AXREIT are at 97.2% due to the management’s capability to secure and retain quality tenants even with the weaker office segment. We expect RM300m worth of properties acquisitions in FY12E, thus swelling the portfolio size to RM1.5b (23% increase) by year end assuming possible finance by placement of 90.8m new units (RM221m new funds) and gearing of slightly less than 0.35x. Assuming all acquisitions are yield accretive, we reckon FY12E GDPU (after dilution) can increase by 5% (+0.3ppt) to 18.8sen (7.0% yield). If so, our TP will increase to RM2.94 from current RM2.82. Going forward, AXREIT is also looking to realize its asset enhancement initiative via property trading,  without significantly affecting income whilst rewarding unitholders with special dividends. We maintain our FY12-13E realised net income of RM81.2m-RM85.8m, which implies corresponding GDPU of 17.9-19.0sen (6.6%-6.3%), which fits our 2Q12 strategy of ‘flight to safety’.

Not worried about the office/industrial segment, albeit weaker office segment dynamics with high incoming supply in the Klang Valley. AXREIT’s good reputation provides comparative advantage with the ability of securing and retaining quality tenants, like Konsortium Logistik Bhd and Tesco Stores (M) Bhd. Industrial portions of the portfolio are not a concern given the longer term leases and tenants in economic resilient businesses (e.g. logistics). We strongly believe the group will be able to maintain portfolio rates at current levels of 97.2%. Also, the weaker  office market provides plenty of bargain acquisition opportunities, particularly when AXREIT is trading at premium NAV of 1.3x. 

Expect portfolio size to grow by 23% to RM1.5b by year end. AXREIT has a ready acquisition pipeline of RM0.5b over the next two years, including the recently completed acquisitions of Logistic Warehouse @ Bayan Lepas (RM48.5m) and another one in Prai (RM59.0m). Including these two acquisitions, we believe the group can acquire up to a total of RM300m worth of properties in FY12, assuming placement of 90.8m new units (RM221m new funds) and gearing of slightly less than 0.35x. If all acquisitions are yield accretive, we reckon FY12E GDPU (after dilution) can increase by 5% (+0.3ppt) to 18.8sen (7.0% yield). If so, our  TP will increase to RM2.94 from current RM2.82. 

Increasing NAV will push valuations higher. BV/share will increase by 3% to RM2.14 post placement and assuming peak valuations of 1.35x Fwd PBV, this implies a fair valuation of RM2.89. The recent and potential listing of Pavilion REIT and IGB Corporation retail REIT, respectively, will lend strength to its overall M-REIT valuations, buoying AXREIT share price as it tends to command a more than 10%-20% premium to M-REIT valuations. 

Ripe for a property trading portfolio. Axis REIT will be looking to realize its asset enhancement initiatives via disposals as some assets are at optimal levels. The sheer number of properties enables the group to trade properties without having overly significant impact on its income. One can expect

special dividends on gains on disposal. We reckon the stock will continue rerating itself because of its unique value proposition, which other M-REITs may not be able to offer in the short to medium term. For now, we maintain our FY12-13E realised net income of RM81.2m-RM85.8m, which implies corresponding GDPU of 17.9-19.0sen (6.6%-6.3%).

Source: Kenanga