Axis Real Estate Investment Trust (Jan 19, RM1.65)
Maintain hold with an unchanged target price (TP) of RM1.67: Axis Real Estate Investment Trust (REIT) reported a slightly stronger fourth quarter ended Dec 31, 2016 (4QFY2016) (realised net profit +2.8% quarter-on-quarter and +6.3% year-on-year [y-o-y]), hence propping up 2016 realised net profit to RM90.3 million, which was 1.4% lower y-o-y.
The results were in line with our expectations and consensus. Gross rental revenue growth was sluggish at +2.2% y-o-y. These were largely caused by a lower estimated portfolio occupancy rate of 91% versus 92% in 2015; and weaker average portfolio rental per sq ft of RM2.08 (estimated) in 2016 against RM2.11 per sq ft in 2015, as outstanding net lettable area increased further to 7.3 million square feet (from 7 million square feet in 2015). A final distribution per unit (DPU) of 2.1 sen was proposed in 4Q2016 (4Q15: 2.0 sen). Total distribution per unit (DPU) for 2016 was 8.25 sen, below that of 2015 (8.4 sen).
Axis REIT’s share price performance has lagged most of the other Malaysian REITs over the last 12 months. What stands out currently is Axis REIT’s financial year ending Dec 31, 2017 (FY2017) to FY2019E (estimates) DPU yields of 5.8% to 6.6% versus the sector at 5.7% to 6% (excluding KLCCP Stapled Group). On a more positive note, potential disposal of mature office assets and more sizeable acquisitions could be catalysts.
We maintain our “hold” rating on Axis REIT, and currently maintain our 12-month dividend discount model-derived TP at RM1.67 (based on a cost of equity of 8%, 6% equity risk premium and 2% terminal growth rate) pending further guidance from management. One of our key concerns is that the revenue growth rate could be slower than our current projections over the next 10 years due to more intense competition from supply of offices and non-offices, while rental reversion outlook could be flattish over the next 10 years (between 1% and 2% per annum), hence affecting our forecast for DPUs. Key risks include oversupply of new office/industrial spaces; higher debt refinancing rates; rebound in business confidence. — Affin Hwang Capital, Jan 19
This article first appeared in The Edge Financial Daily, on Jan 20, 2017. Subscribe to The Edge Financial Daily here.