Axis REIT - Continue to seek acquisition targets

We attended Axis REIT’s (AXREIT) 4Q12 result briefing yesterday. Over FY12, the number of properties under its portfolio increased to 31 from 27 after the acquisition of 5 properties (including under negotiations) and the disposal of Kayangan Depot. Going forward, the company is eyeing RM660m worth of new acquisitions which will be focused on industrial assets, particularly  in Johor. The group will be raising 90.8m new units to help fund  these new acquisitions. Maintain FY13-14E gross yield of 5.5%-6.6%. Reiterate MARKET PERFORM and TP of RM3.18 (ex-placement) based on FY13E target gross yield of 5.4%. 

Eyeing RM660m worth of properties in 2013. Total acquisition for the year came in at RM219m, below our FY12E expectation of RM300m. Management cited a major reason was the slow progress in acquiring industrial assets in Port of Tanjung Pelepas (PTP), Johor. Total value of assets currently under negotiation stands at RM660m for FY13. 

Targeting industrial properties.  AXREIT continues to target industrial properties, i.e. supply-chain/logistics business, and we view this positively as it will act as an insulating factor given the softer Klang Valley office market. Recall over FY12, AXREIT acquired 2 industrial properties in Penang and 1 in Negeri Sembilan, worth a total of RM138m. They are in the midst of negotiating over RM600m of new industrial property acquisitions with implied net property yield of c.8% vs. their portfolio’s 8.9%, of which 3 are in Johor. 

Shifting into longer term borrowing with RM100m Sukuk. In order to hedge potential interest rate hike risks, AXREIT is shifting into longer term borrowings which carry lower rates. They have just launched their first RM110m Sukuk at an attractive rate of 4.6%, similar to 2012 effective interest rate of 4.6%. This RM110m, with tenure of 10 years, is part of a RM300m Sukuk program. 

Placement of 90.8m could raise up to RM270m. Timing could not be more ideal given that the stock is trading at FY13E 1.4x PBV. Cash from placements can pare down gearing to 0.18x. Assuming AXREIT’s comfortable gearing level of 0.35x, the group can buy up to c. RM440m worth of assets. However, AXREIT will only do the placement if negotiations of assets are successful, else it will be dilutive. Note that our estimates take into account a post placement scenario and we will  impute for new acquisitions upon announcements. In the meantime,  we maintain our earnings estimates and FY13-14E GDPU of 17.2 sen –  20.5 sen (5.5%-6.6% yield). 

No changes to TP of RM3.18.  Post its 4Q12 results yesterday, we had upgraded our target price to RM3.18 based on a target gross dividend yield of 5.4%. We are assuming 3.0% 10-yr due to heightened GE risks, in addition to global economic uncertainties, but maintain a spread of +2.4%, implying a target FY13E gross yield of 5.4%. 

Maintain MARKET PERFORM based on total return of 6.5%. Although we have raised our TP, AXREIT is not an OUTPERFORM. We noticed that its last few asset acquisitions has lower NPI yields compared to its portfolio, indicating a more aggressive cap rate environment which may makes asset acquisitions challenging in the near future. The recent buzz in Johor will also drive asset valuations higher, which will add to AXREIT challenge.   

Source: Kenanga