By Violet Ooi
As one of the earliest REITs to be incorporated in Malaysia, Axis-REIT is a familiar name among Malaysia’s real estate investment trusts. Despite weak results lately, round after round of acquisitions this year could significantly drive its future earnings.
Business model: Axis Real Estate Investment Trust (Axis-REIT) was founded in June 2005 and prior to that was an investment holdings company called Axis Development Sdn Bhd. It went on to be the first REIT to be listed on the main board of Bursa Malaysia in August 2005.
It started off with only five properties with RM300 million worth of assets. The REIT’s principal focus is on the Malaysian commercial and industrial properties. It owns a diversified portfolio of properties in the Klang Valley, Penang, Johor and Kedah which comprises commercial offices, office/industrial, buildings, warehouse/logistics centers, light industrial buildings and warehouse retail facilities. These properties mainly house multinational and local companies.
In December 2008, Axis-REIT was restructured according to the Securities Commission’s Islamic guidelines and was classified as a Syariah-compliant REIT in December 2008.
Axis-REIT Sukuk Bhd was incorporated by Axis-REIT to enable the establishment of a sukuk programme of RM300 million in nominal value. It has thus far issued two sukuk valued at RM110 million and RM155 million respectively.
As of 3Q14 (third quarter of financial year 2014), Axis-REIT’s total assets stood at RM1.6 billion.
Shareholder and management assessment: Axis-REIT largest shareholder is Permodalan Nasional Bhd (PNB) which owns 17.6% of the company, followed by the Employees Provident Fund (EPF) which owns 12.4%. The rest includes Public Mutual Bhd with 7.23% and Retirement Fund Incorporated (KWAP) with 6.89%.
The REIT is managed by Axis-REIT Managers Bhd. Its CEO (chief executive officer) and executive director is George Stewart Labrooy who is also a board member of the Asia Pacific Real Estate Association (APREA) and the chairman of the Malaysian REIT Managers Association (MRMA).
He is currently a member of the Institute of Engineers, Malaysia and has more than 20 years of experience in the Malaysian industrial sector.
Its chairman Tunku Shahabuddin Tunku Besar Burhanuddin is a member of the Negeri Sembilan royalty and is currently serving on the boards of several public companies namely Berjaya Assets Bhd and Iris Corporation Bhd. He is also the executive chairman of Strateq Sdn Bhd, a provider of integrated solutions and services to business sectors.
Stock performance: Axis-REIT has been trading at a 52-week range of RM2.8 to RM3.70 with a one-year return of 16.67% and experiencing a general uptrend since January.
It has been trading below FBMKLCI over the year but has since then surpassed the index starting from September. It hit RM3.70 on Nov 4, highest in 2014 so far.
It carries a beta coefficient of 0.59 indicating that it is trading below market volatility with a market capitalisation of RM1.7 billion.
What analysts think: For starters, it has posted a below-expectation net profit for 9M14 (first nine months of financial year 2014) at 65% or 68% of full year estimates due to low occupancy rate and the disposal of Axis Plaza.
Most analysts pointed out that its overall lower occupancy rate in the third quarter for the financial year 2014 (3Q14). The occupancy rate registered a “slight drop” to 90.5% in 3Q14 compared to 92% in 2Q14 owing to some tenants not renewing leases and the vacancy in Axis Business Campus due to major refurbishment works.
RHB stated that revenue was also affected by the disposal of Axis Plaza, one of the original assets in Axis-REIT’s initial public offering (IPO) which according to chairman Tunku Shahabuddin had “matured to a point the manager could not add any further value and rental growth was limited”. Nonetheless RHB projected that the vacancy is very likely to be temporary.
The disposal resulted however “boosted bottom line and shareholder return” as noted by AllianceDBS as it realized disposal gain of RM11 million which is being distributed. “The final tranche of the payout will be included in the third interim distribution/dividend of 5 sen,” said AllianceDBS.
The good news is Axis-REIT is on the path for more acquisitions. It has thus far signed four out of five planned acquisitions this year which has amounted to RM434 million. Its acquisition budget is RM472 million. The latest sales and purchase agreement (SPA) to acquire Yongnam Nusajaya properties was signed in early October.
RHB views Axis’ aggressive asset acquisitions in recent months positively and believes that more yield-accretive acquisitions could be in the cards going forward to further drive the REIT’s earnings growth.
Earnings Forecast:
Axis-REIT’s acquisitions thus far:
StockStalk: Putting aside lower occupancy rate and a slightly disappointing 9M14 earning, there are reasons to stay positive as Axis-REIT is currently on an acquisition drive and in the middle of several refurbishment works.
Axis-REIT is undertaking an RM57.8 million refurbishment works on its Axis Business Campus (ABC) which will be reopened for leasing. The resulting lower occupancy which has contributed to weak earnings would be a short-lived one as enhancement of asset and facility could bring in premium rents and the management expects it to project 13% gross yield.
It is not surprising that good tenancy would boost the company’s earnings from FY15 onwards as noted by AllianceDBS. Other asset enhancement projects include the refurbishment of Axis Business Park and Wisma Academy Annex which would cost RM30 million and RM10 million each.
The fifth acquisition is underway as Axis-REIT has signed the letter of offer for the RM38 million facility in Prai, Penang and is carrying out due diligence at the present.
The aforementioned acquisitions as well as the upcoming one could overall contribute to stronger earnings and thus catalyse the stock.
However it is important to note that while income is expected to improve moving forward, the acquisitions are expected to be financed with borrowings, hence debt would pile up.
Nonetheless the REIT’s proposed private placement of 84 million new units has been approved by unitholders and would raise RM280 million in total and thus trim its borrowings. The placement comes as no surprise as it has previously undertaken similar practice when its gearing surpassed 35%. AllianceDBS noted that the net effect would be 34% net gearing, well below the 50% threshold.
According to AllianceDBS, in term of financing costs, Axis-REIT should not be susceptible to extreme rate shock despite rising rate in Malaysia as it has shifted majority of its borrowing to fixed-rate. This can also partly be explained by the possible pare-down of flexible rate borrowing due to the incoming placement and the REIT’s previous success in issuing fixed-rate sukuk paper.
When contacted to comment on the ability of Axis-REIT to lock in the rates for new acquisitions, Labrooy was confident. He expressed the REIT’s intention to launch more sukuks next year to restructure its debt as the REIT can issue sukuks which find favour with the Islamic capital market thus allowing them to secure more fixed-rate funding next year.
In fact, its financing cost is slashed by 6% for 2Q14 on year-on-year basis due to refinancing efforts and repayment of loans after the disposal of Axis Plaza which according to Kenanga’s analysts should suffice to compensate for the rise in expenditure.
Dilution could result from the placement which might see an unexciting distribution per unit (DPU) and earning per unit (EPU) but improved earnings from the new acquisitions could offset the effect.
Labrooy is certain that the placement would not result in dilution.
“If you review our track record we have done four placements since listing and none have been dilutive. In fact after each placement the fund has gone on to perform remarkably well. The units issued are always backed by new acquisitions which are accretive to the fund so our unitholders never lose out,” he said.
In addition to being a non-speculative stock, Axis-REIT has charted a solid growth path for itself by way of optimising occupancy, enhancing its portfolio through transformation of buildings, prudent capital and operational expenditure management as well as selling assets upon maturity with good capital gain in valuation.
Besides, its portfolio provides an unleveraged gross return of 10.32% for the first three quarters of 2014 as many of the group’s assets are currently having double digit returns.
Axis-REIT is projected to be worth RM200 million with 34 assets by the end of the year.
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Important Note and Disclaimer: This article should NOT be taken as a cue to either buy or sell the stock. The intention is to highlight the key factors you might want to think about before plunging in or scrambling out. While KiniBiz makes every endeavour to ensure facts are right and opinion is fair, no liability can be assumed for anyone relying on this information. In other words let the buyer (or seller) beware — a reflection of Bursa Malaysia, we say.
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