Mild positivity for Axis REIT acquiring more industrial assets
KUCHING: Analysts were positive on Axis Real Estate Investment Trust’s (Axis REIT) proposal to buy an industrial asset in Shah Alam for RM87 million.
Axis REIT has proposed to acquire a warehouse and manufacturing facility alongside 10.1 acres of land in Shah Alam Section 28. The net lettable area of the building on the land totals 254,233 square feet (sq ft).
The building is currently used for warehousing and assembly of electrical goods while 22,449 sq ft of the land area is currently used as a car park.
The freehold asset is purchased from Teraju Sinar Sdn Bhd and will be leased back to the vendor for six years upon completion of the acquisition, which is expected in second half of the financial year 2018 (2HFY18).
MIDF Amanah Investment Bank Bhd (MIDF Research) saw a potential earnings impact of two per cent in FY18F as Axis’ core net income is expected to increase to RM117 million from RM115 million assuming that the new property contribute four months of rental income.
In an arrangement to ensure rental income visibility, the rental from the first year up to the third year will be paid in advance upon commencement of the lease, which will be kept in the stakeholder’s account.
At the end of the first year, the lessee is expected to pay the advance rental payment for the fourth year, and until the end of the sixth year, the advance rental of the sixth year shall be paid.
On the other hand, Axis’ gearing level is expected to increase to 35.26 per cent as the acquisition is expected to be fully- funded through debt.
“We are positive on the acquisition as we believe that the new asset is yield accretive to the REIT with a net yield of seven per cent versis financing cost of about 4.5 per cent,” it said. “Moreover, we like the arrangement of the three-year advance payment of rental, which provides income certainty for Axis.
“The acquisition price of RM87 million is also below the net book value of RM92 million.”
Kenanga Investment Bank Bhd (Kenanga Research) meanwhile was not surprised as this asset was one of Axis REIT’s targeted acquisitions which had a pending Letter of Offer (LO).
The asset’s net yield is also decent at seven per cent which is in line with Axis REIT’s recent industrial acquisitions net yields ranging from seven to 7.5 per cent.
“All in, we are fairly neutral on the acquisition as the impact to earnings is not overly significant,” it said in a separate note.
“However, we do favour industrial asset acquisitions over multi-tenanted office spaces due to the long-term earnings stability from longer lease terms. Additionally, due to the single tenancy nature, there is less risk of losing tenants, while occupancy is maximised.”
Moving on, Kenanga Research saw that FY18 and FY19 would see minimal leases expiring at 16.6 to 14.9 per cent of Axis REIT’s portfolio’s NLA.
To note, the REIT has a pending Letter of Offer to acquire an industrial facility in Senawang, Negeri Sembilan for RM18.5 million, and three industrial facilities in Indahpura, Johor for RM45.2 million.
“We have yet to account for earnings contributions as details are sketchy pending SPA announcement. We believe the group will likely incur borrowings to fund these potential acquisitions.
“FY18-19 growth is expected to driven by the inclusion of Nestle Distribution Centre -- previously known as Axis PDI Centre - - and its second greenfield for Upeca Technologies Sdn Bhd at Subang.”
MIDF Research maintained its market perform call and increased its target price to RM1.30. Kenanga Research maintained its buy call with an unchanged target price of RM1.57 per share as it made no change to its earnings assumption pending completion of the deal.