Axis REIT - Time to revisit this REIT

Target RM3.14 (Stock Rating: ADD)

We came away from Axis REIT's 4QFY13 analyst briefing feeling better about its outlook relative to our previous stance. We gather that its dry spell in terms of acquisitions is likely to come to an end as management seems confident of securing new assets in 2014. Given the potential acquisitions, coupled with Axis REIT's share price underperformance, we upgrade our call in the stock to a Buy, with a revised DDM-based target price of RM3.15, after we revised our cost of equity assumptions t0 9.2% from 9.4% previously. We believe that new-asset acquisition newsflows could catalyse the stock. Axis REIT is now our top pick and only pick in the REIT sector, due to its more attractive acquisition outlook relative to the others.

What Happened 

We attended Axis REIT's analyst briefing which was held at The Westin Hotel in Kuala Lumpur. Approximately 40-45 analysts and fund managers took part in this event. We were positively surprised when Axis REIT's CEO, Datuk Stewart LaBrooy, started off the briefing by highlighting that Axis REIT would be in "buying mode" in 2014. The CEO went on to proclaim that 2013 was a quiet year in terms of acquisitions due to the tougher market conditions.. 

What We Think 

As a result of the briefing, we have become more positive about Axis REIT's outlook vs. our previous stance. Our view is premised on the tone of the briefing which indicated that its acquisition drive could start again. Relative to the other REITs under our coverage that are mostly retail/commercial plays, we believe that Axis REIT's acquisition outlook is better due to its primary focus on industrial properties. Furthermore, given its strong potential of gaining exposure to Iskandar, we believe that Axis REIT's outlook is more exciting moving forward. 

What You Should Do 

We believe that FY15 yields could fall further to 6.2-6.5%, weighed down by its new acquisitions. Although we are mindful of rising interest rates, the yield compression that we highlighted previously still implies a 200bp spread over the current 10-year MGS yields of 4.15-4.2%. Thus, we upgrade Axis REIT to an Add from a Hold. We expect new-asset acquisitions to catalyse the stock moving forward, while downside risks remain buffered by its dividend yields.