Axis REIT - Excited about Johor!

We attended Axis REIT (AXREIT) result briefing which was well attended. They emphasized they are on schedule to meeting the RM1.5b  portfolio  asset  size  target  upon  completing  their placement and acquisition of Wisma Academy/Annex and Emerson Facility@Nilai. They are eyeing RM228m worth of new acquisitions which are mostly industrial assets in Johor. Management believes in the strong growth story propelled by Iskandar Malaysia and strong Singaporean buy-ins via the migration of Singaporean SMEs to Johor. Industrial properties will be the main focus going forward, given the competitive landscape and unattractive pricing of offices; concentration on supply-chain/logistic/warehousing businesses provides an ‘evergreen’ safety net for the REIT. There are no changes to our estimates and we anticipate FY12-13E gross yields of 6.5%*-6.0% (FY12E includes 1.3sen additional dividends from gains of disposal of Kayangan Depot). Maintain TP of RM2.90 (post-placement and new acquisitions) given the immaterial adjustment to FY13E, based on unchanged FY13E target net yield of  5.5%***.  Although  we  continue  to  like  AXREIT  for  its aggressive yet nimble growth strategies, the recent share price run-up now only offers a limited total return of 6%. However, existing shareholders should consider the upcoming placement as prices tend to be discounted,  offering cheaper entry points. Reiterate MARKET PERFORM. 

Bulking-up on industrial properties… AXREIT continues to tap on the ‘evergreen’ supply-chain/logistics  business. To date, the group has completed two acquisitions and is looking to finalize another two (Emerson Facility in Nilai and Wisma Academy/Annex), which amounts to a total of RM220m worth of acquisitions done this year vs. our FY12E expectations of up to RM300m.  They are in the midst of negotiating RM228m new industrial asset acquisitions with implied net property yields of 8.5%. AXREIT is on the Iskandar Malaysia (IM) bandwagon as 3 out of 5 assets under negotiation are industrials in Johor; it reinforces our views Singaporean SMEs migration to Johor. To be fair, AXREIT has always been optimistic on Johor as it already has two existing industrial assets in PTP, Johor. Post the announced acquisitions and placements, we expect gearing of 0.19x; hence AXREIT can gear up by another RM245m, assuming comfort levels of 0.35x.

…and beefing-up existing office spaces. The group has lowered their office exposure to 43% from 66%  (4Q08) as the Klang Valley office segment is facing oversupply issues. AXREIT is seeking MSC status for some of its offices (refer overleaf) to improve marketability amongst MNCs. 

Occupancy rate to improve further by year end. The portfolio has a healthy occupancy rate of 97.7% (1Q12’s 97.2%) and achieved positive rental reversion of 2%-25% for 5.8% of their portfolio’s NLA. Majority of the 29 properties are 100% occupied, except for Fonterra HQ, Wisma Kemajuan, Infinite Center and Axis Plaza which have between 80%-90% occupancy rate; management is positive that they  can achieve >90% occupancy rate on the said properties by year end. However, this does not have material impact on our estimates; hence we maintain our FY12-13E RNI of RM89.5m-RM95.1m. Their weakest asset, Kayangan Depot (65% occupancy) is being disposed and investors stand to get an additional 1.3sen GDPU from gains of disposal. We estimate FY12-13E gross yields of 6.5%*-6.0%.

Source: Kenanga