• Reiterate Add rating, with an unchanged DDM-based TP of RM2.01, given its diversified property portfolio and exposure to industrial assets.

• 9MFY23 core net profit came in at 65% of forecast with 92% occupancy rate (vs. 95% in 9MFY22). Expect better earnings in 4QF driven by acquisitions.

• 3Q23 DPU of 2.15 sen takes 9MFY23 DPU to 6.25 sen. The stock offers FY23-25F yields of 5.4-5.9%.

3QFY23 Core Net Profit Impacted by Lower Occupancy Rate

• For 3QFY23, Axis REIT reported a core net profit of RM37.3m (-4.6% yoy; +10.5% qoq), taking 9MFY23 core net profit to RM103.6m (-14.9% yoy). Occupancy rate stood at 92% as at Sep 23 (vs. 95% in Sep 22). Our core net profit excludes fair value changes on derivatives. 9MFY23 core net profit came in at 65% of our FY23F forecast. However, we expect earnings to come in stronger qoq in 4Q23F, following the completion of Bukit Raja Distribution Center 2, in Aug 23.

• One of its properties, Axis Steel Centre @SiLC Johor has been vacant since June 23 due to rental default. However, as at end-Sep 23, 51 out of 62 properties under management were at 100% occupancy rates. Axis REIT declared a DPU of 2.15 sen for 3QFY23, taking 9MFY23 DPU to RM6.25 sen.

Positive on Acquisitions

• Several highlights during the 3QFY23 include: i) signed a sales and purchase agreement to acquire an industrial manufacturing facility in Sendayan, Negri Sembilan for RM48m (100% occupancy rate); ii) handed over the Bukit Raja Distribution Center 2 development to Shopee Express Malaysia (not listed) in Aug 23; and iii) accepted a letter of offer to acquire a hypermarket for RM25.74m in Temerloh.

• We are positive on group’s acquisitions, especially in the increasing in-demand industrial property segment. As at 30 Sep 23, 13% of its portfolio was office/industrial (vs. 14% as at Sep 22). Logistics warehouse remained the largest at 55% of its total portfolio. We believe the upcoming pipeline of properties will help to offset the loss of income contribution from Axis Steel Center @ SiLC.

Add Rating and TP Intact

• No changes to our forecasts and Add call on Axis REIT, as we continue to like its diversified portfolio consisting of logistics warehouse, industrial, manufacturing facilities and hypermarkets, as well as its early foray into the industrial property segment, which would allow the group to specialise in this increasingly important property segment, in our view. Our DDM-based TP of RM2.01 (CoE 7.3%) also remains intact.

• Re-rating catalysts include continuous asset acquisitions which we believe will positively contribute to earnings and securing a tenant for Axis Steel Center which will lift its portfolio’s overall occupancy rate. Downside risks include inability to secure a tenant for the vacant property and non-renewal of expiring leases. The stock is also supported by FY23-25F dividend yields of 5.4-5.9%.

Source: CGS-CIMB Research - 30 Oct 2023