Axis REIT on the acquisition trail

Axis REIT (Apr 29, RM2.37)
Maintain buy at RM2.36 with target price of RM2.60: Axis REIT's RM16.2 million realised net profit in the first three months of 2011 (+0.2% q-o-q, +38% y-o-y) was within expectations. Its 4.2 sen dividend per unit (DPU) was also in line. We believe Axis REIT's hands-on management and proven track record will remain the pull factor for the stock. It currently trades at 7.5% gross yield (against 8.2% industry average). There is no change to our earnings forecasts and RM2.60 discounted cash flow-based target price.

Y-o-y growth in net profit was driven by: (i) full-year contributions from properties (SP Logistics Sdn Bhd warehouses 1 & 2, Tesco Bukit Indah, Axis PDI Centre and Axis Technology Centre) acquired in 2010; (ii) newly-acquired asset — PTP D8 in Johor (March 2011); and (iii) better occupancy rates and 3% to 10% rental hikes from existing assets (Menara Axis, Crystal Plaza, Infinite Centre and Wisma Kemajuan), except for Axis Business Park (-4.75% rental revision due to incentives given to a long lease agreement).

Axis REIT has declared a 4.2 sen DPU (+13.5% y-o-y; 97% payout).

Post the acquisition of Axis Eureka in April 2011 and disposal of Axis North Port Centre in April 2011, Axis REIT's asset size stood at RM1.3 billion (+5.7% from 2010). Axis REIT targets to hit RM1.5 billion asset size by end-2011. It has RM426 million worth of properties in the pipeline.

To retain its financial flexibility, it had proposed an up to 75.2 million new unit placement (20% of existing 375.9 million units) in February 2011. We estimate about 17% earnings per share dilution but the impact could be lower as Axis REIT normally multiplies its yield-accretive acquisitions and placements. Assuming RM177 million placement proceeds (RM2.36 issue price), gearing would improve to 0.24 times from 0.36 times as at March 2011. — Maybank IB Research, Apr 29