Research houses were divided on whether the new acquisition of tenanted industrial property in Kawasan Perindustrian Sendayan Techvalley, Seremban would results in significant yield for Axis Real Estate Investment Trust (Axis).
Kenanga Research, in its Company Update, said the acquisition in Seremban for RM48 million will only bring earning gradually.
“Based on an asset yield of 6.25%, the acquisition is earnings accretive (given Axis’s current overall investment asset yield of c.6%),” it said today (Oct 26).
Kenanga noted that Axis offers proxy to industrial assets which may benefit from the relocation of MNC’s manufacturing base to Southeast Asia from China.
However, the research house said it keeps its UNDERPERFORM call as Axis’ current yields are unattractive.
Pending the completion of the deal, it maintain its forecasts and TP of RM1.55, based on an unchanged target yield of 5.5% (derived from a 1.5% yield spread above our 10-year MGS assumption of 4.0%), with no adjustment based on ESG 3-star rating.
“The risks to our call include bond yield expansion, higher or lower than-expected rental reversions, and higher-than-expected occupancy rates,” it said.
Kenanga noted that Axis is acquiring a tenanted industrial property within Kawasan Perindustrian Sendayan Techvalley in Seremban from BSS Development Sdn Bhd, Matrix IBS Sdn Bhd and the Menteri Besar, Negeri Sembilan (Incorporation) for RM48 million in cash.
The property, comprising a 637,331 sq ft freehold land with an existing industrial complex, is currently leased to an international manufacturing company on a 6-year lease in Mar 2023 at a rental of RM250k per month (or RM3.0m per year), subject to an 8% increase from Mar 2026.
“This translates to an annual yield of 6.25% (vs. Axis’ current overall investment asset yield of c.6%) in line with the group’s FY23 acquisition target of RM170m.
“Based on our estimates, the acquisition will boost our FY24F core net profit by c.1%, while raising its net debt and gearing of RM1.49b and 0.54 times as at June-end this year to RM1.53b and 0.56 times, respectively.
“This is still below the 60% gearing restriction in compliance with the REITs’ listing rules of Bursa Malaysia,” it said.
Meanwhile, RHB Investment Bank (RHB IB) viewed the acquisition positively, in its Company Update today.
RHB IB maintains a BUY call, and keep the earning forecast unchanged, pending the completion of acquisition, with RM2.08 TP, 15% upside and c.6% yield.
“Axis REIT is slated to report its 3Q23 earnings on 27 Oct 2023. Our unchanged TP incorporates a 2% ESG premium based
on our in-house methodology. Key risks include non-renewal of its expiring leases and increased competition,” it said.
“The property has a gross yield of 6.3%, is fully occupied, and has a fixed 8% rental increment on Mar 2026. We continue to like Axis REIT as a proxy to the resilient industrial property segment,” it said, adding that 5-year old property has a total NLA of c.105,311 sq ft.
RHB noted that the acquisition is slated for completion in 1H24 and to be fully funded via borrowings.
“It intends to fund the acquisition via its existing bank financing. We estimate that this will increase its gearing level slightly to 35% from 34% as at end Jun 2023,” RHB IB said.
Axis previously announced that it has an acquisition target value of MYR170m for 2H23, which would raise its gearing level to 36%.
“We are mildly positive on the acquisition. The gross yield of 6.3% is slightly higher than the REIT’s FY24F yield of c.6%, making it a yield accretive acquisition.
“However, due to the size of the asset, we expect the net income to only increase 0.5% on a full-year basis. The asset yield should increase over the years with the rental rate step-up, and the property’s relatively young age should limit the amount of asset enhancement required for upkeeps,” it said.
