Axis REIT (AXREIT) registered 3QFY23 realised net profit of RM37.9m (-4.4% YoY, +2.9% QoQ), which is still lagging our and consensus full year forecasts. In 9MFY23, the Group’s realized net profit of RM103.9m (-14.2% YoY) only constitutes about 67% of our and consensus full year estimates. The lower profits were attributed to a weak 1HFY23 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. The current quarter’s performance was however lifted by completion of the development of Bukit Raja Distribution Centre 2 with lease commencement on 1 August 2023, new tenancy for Axis Shah Alam Distribution Centre 3 in August 2023 and other new tenancies. All told, we adjust our FY23-25 estimates downwards by 6%/6%/5% after revising our occupancy assumptions and imputing higher costs. Group portfolio size remained unchanged at 62 properties valued at RM4.4bn, with average occupancy of 92%. Space under management is now at about 13.4m while financing ratio is currently at 35%. Maintain Neutral call with DDM-derived TP unchanged at RM1.96.

• 9MFY23 Net Property Income dropped marginally by 0.5% YoY to RM209.3m mainly attributed to a weaker 1HFY23, 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 during the period. However, we understand that the Group’s property income has shown improvement as compared to the previous 2 preceding quarters due to completion of the development of Bukit Raja Distribution Centre 2 with lease commencement on 1 August 2023 and starting rental of RM1.35m per month, new tenancy for Axis Shah Alam Distribution Centre 3 in August 2023 and other new tenancies. As such, its realized net income has improved by 10.5% QoQ. Separately, it has signed the sale and purchase agreement to acquire a manufacturing facility in Negeri Sembilan for RM48m on 25 October 2023, and also accepted the Letter of Offer to acquire a hypermarket for RM25.8m located in Pahang.

• 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 - 30 Oct 2023