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Author: HLInvest   |   Latest post: Mon, 2 Dec 2019, 9:11 AM

 

Axis REIT - Acquisition in Nusajaya

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Axis REIT has proposed to acquire 2 industrial properties for a total sum of RM55.8m from Nusajaya Tech Park Sdn Bhd. Upon completion by FY19, the properties shall be leased to GKN Engine Systems Component Repair Sdn Bhd and Sternmaid Asia Pacific Sdn Bhd. We are positive on the news; we feel that the acquisition amount is fair and yield accretive. We maintain forecast pending acquisition completion. We revise our 10-year MGS yield to 3.7% following the downward trend. Maintain BUY with higher TP of RM1.97 (from RM1.93), based on targeted yield of 4.8%. We like Axis REIT due to its high occupancy diversified portfolio and being one of the few Shariah compliant REITs.

NEWSBREAK

Axis REIT has proposed to acquire 2 pieces of land; (i) Property 1: a freehold industrial land (c. 158k sq ft) inclusive of 3 detached factories that comes with 1 guard house and 1 bin centre and (ii) Property 2: a freehold industrial land (c. 70k sqft) with 1 detached factory,1 guard house and 1 bin centre, from Nusajaya Tech Park Sdn. Bhd. It is located in Taman Teknologi Nusajaya, Iskandar Puteri, Johor.

The proposed acquisition will cost RM55.8m (Property 1: RM42.0m, Property 2: RM13.8m), to be funded by existing debt facility. The Properties have full occupancy as at 13 August 2019 and the proposal is expected to be completed by 4Q19.

Upon completion, Property 1 (NLA: 105k sqft) shall be leased to GKN Engine Systems Component Repair Sdn Bhd for a fixed period of 6 years expiring on 15 July 2024 (commenced 16 July 2018) with an option to renew for another 6 years. The rental rate is at an agreed monthly rental of RM262k per month for the first 3 years, followed by a monthly rental of approximately RM293 for the remaining 3 years. Whereas, Property 2 (NLA: 42k sqft) shall be leased to Sternmaid Asia Pacific Sdn Bhd for a fixed period of 5 years expiring on 14 August 2022 (commenced 15 August 2017) with an option to renew for another 5 years. The rental rate is at an agreed monthly rental of RM93k per month for the fixed period of 5 years.

HLIB’s VIEW

Positive. We are positive on the acquisition as it is yield accretive, given the net yield of 7.0% (before Islamic financing cost) vs its current yield of 5.0%. With the new assets, our FY20-21 earnings will improve by 0.4%. The properties already have fixed tenants for 6/5 years with an option to renew another 6/5 years; this minimises the risk to Axis REIT of looking for a tenant. We feel the acquisition price works out to be fair for industrial space in Nusajaya; Property 1 price is at par with the current market value whereas Property 2 price is lower than current market value, based on valuations by the independent valuer.

Gearing. Axis REIT intends to utilise debt facility of RM55.8m from its existing credit facilities. Gearing ratio is expected to increase to 38.5% from 37.3% (FY18).

Forecast. We maintain our forecast as we expect contribution will only kick in in FY20, pending completion of the acquisition.

Maintain BUY, TP: RM1.97. We revise our 10-year MGS yield to 3.7% from 3.8% following the downward trend (currently at 3.4%), we maintain BUY with higher target price RM1.97 (from RM1.93). To note, our valuation is based on 1SD below 2-year historical average yield spread between Axis REIT and 10-year MGS yield in view of increased popularity in industrial properties, high occupant tenancy in its diversified portfolio and also one of the few Shariah compliant REITs.

 

Source: Hong Leong Investment Bank Research - 14 Aug 2019

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