Axis REIT’s (AXREIT) 2QFY23 realised net profit again came in weaker than expected at RM33.6m (-21.3% YoY, +3.8% QoQ). In 1HFY23, Group net profit of RM70.4m (-11.7% YoY) only constituted about 44% and 43% of our and consensus full year estimates. The earnings miss were mainly due to lower occupancy for Axis Shah Alam Distribution Centre 3 from one of the tenancies that expired in December 2022, termination of lease agreement with Yongnam Engineering Sdn Bhd (the lessee of Axis Steel Centre @ SiLC) and higher costs incurred due to on-going development projects and major enhancement implemented during the year. As such, we adjusted our FY23-24 downwards by 4%/4%/6% after revising our occupancy assumptions and higher costs. Group portfolio size remained unchanged at 62 properties valued at RM4.4bn, with 48 properties fully occupied. Space under management is about 12.7m while financing ratio is currently at 34%. Portfolio occupancy is at 89% with weighted average lease expiry of 4.96 years. Maintain Neutral call with DDM-derived TP unchanged at RM1.96.

• 1HFY23 Net Property Income dropped 3.4% YoY to RM116.0m in 1HFY23 mainly attributed to due to lower occupancy for Axis Shah Alam Distribution Centre 3 from one of the tenancies that expired in December 2022, termination of lease agreement with Yongnam Engineering Sdn Bhd (the lessee of Axis Steel Centre @ SiLC) and higher costs incurred due to on going development projects and major enhancement implemented during the year. Also, 1HFY22 was partly lifted by one-off income of RM6.7m from the disposal of recycled materials. AXRB has spent a total of RM129.1m YTD on capital expenditure (RM5.2m spent for enhancement of existing properties, RM83.5m for the ongoing development project Bukit Raja Distribution Centre 2 and RM40.4m for the ongoing development project Axis Mega Distribution Centre (Phase 2)). Elsewhere, the Group announced the acceptance of Letter of Offer to acquire a logistics warehouse for RM92m during the quarter, located in Kawasan Perusahaan Kulim, Kedah. As for development projects, the Bukit Raja Distribution Centre 2 development project obtained Certificate of Practical Completion (CPC) on 26 June 2023 and anticipate to obtain the Certificate of Compliance and Completion (CCC) in August 2023.

• Acquisition targets worth RM170m in the pipeline. The Group is still looking to expand its asset portfolio with focus on Grade-A logistics facilities and manufacturing facilities with long leases from tenants with strong covenants. The assets targeted will be well-located logistics warehousing in locations ideal for last-mile distribution. In addition, the Group is also looking at office, business parks and industrial properties with potential for future enhancement.

Source: PublicInvest Research - 27 Jul 2023