KLCI : 1,829.18
(Upgrade from HOLD)
Price Target : 12-Month RM 3.70
Recent selldown an opportunity to buy stock for 7% distribution yield
Growth drivers intact; shielded from higher electricity tariffs and assessment tax
Upgrade to BUY, but maintain RM3.70 TP
Fundamentals intact. Axis REIT’s unit price has fallen 14% since Nov 2013 on the back of thinning distribution yield spread over the 10-year MGS yield which has risen by c.50bps. Despite the drop in REIT stocks, the sell down is unjustified, as Axis REIT is shielded from higher electricity tariffs (we estimate only 20% of total property expenses is electricity expense) and assessment tax (its assets are not in Kuala Lumpur). Its current properties are also healthy at 95% occupancy and still under-rented against the market.
Growth potential still strong. Axis REIT still has a solid asset pipeline, negotiating for RM317m worth of properties at 7-8% rental yields. It is also supported by ongoing refurbishment works on its assets (Axis Business Campus, Wisma Academy) to boost NPI yields. The REIT will also benefit from its sponsor’s efforts to drive the industrial sector by constructing industrial parks in key logistics regions. Its sponsor’s i-Park development is progressing well and could mean acquisition opportunities for Axis REIT in 2014-16. We tweaked FY14-15F earnings by +3%/-4% after imputing gains from the sale of Axis Plaza, higher electricity expenses and cost of debt, pushing back our acquisition assumptions to 1H14 (although the acquisitions are more likely as it is from the REIT promoter’s PE arm), and loss of income from Axis Plaza in subsequent years.
Upgrade to BUY. Valuation for Axis REIT is more attractive now than when we downgraded the stock in Aug 2013, as it now offers a 7% forward distribution yield for exposure to a resilient industrial/logistics sector. The disposal of Axis Plaza, expected to completed by Apr 2014, could result in a bumper distribution of 2sen/unit (we expect a placement in 2014).
Low refinancing risks. Axis REIT’s current floating rate shortterm loans include RM290m revolving credit, which may be pared down via a unit placement in 2014. Beyond this, the REIT does not have other near-term refinancing risks, as it recently drew down 5-7 year Sukuk at 4.1-4.2% blended finance rates in 2012 and 2013. Average cost of debt for the REIT is 4.35%. Nevertheless, we added 25bps to our assumed finance cost, which does not impact the REIT’s earnings significantly.
Axis REIT currently has RM317m worth of assets under negotiation, and could be acquiring assets from its sponsor (through the i-Park industrial park development with AME Group). To recap, Axis Group and AME Group had entered into a 50-50 joint venture to build an industrial park in Johor on 93ha of land in Kulaijaya. Axis REIT will benefit from sale and purchase agreements from companies that are not looking to own the industrial assets, although we think the larger lots may be more attractive to the REIT. However, this is more long-term in nature towards 2016.
Publish date: 07/01/13