Within expectations. 3Q19 core net profit of RM28m (-3.2% QoQ, -4.3% YoY) brought the 9M19 sum to RM85.8m (+10.8% YoY). The results were in line with our expectations but slightly below consensus accounting for 73.1% and 71.7% of full year forecast respectively.

Dividend. Declared 3Q DPU of 2.35 sen per unit (2Q18: 2.35 sen), going ex on the 4th Nov 2019.

QoQ/YoY. Revenue for 3Q19 of RM55.7m (+1.2% QoQ; +3.4% YoY) translated to core net profit of RM28m (-3.2% QoQ; -4.3% YoY). The increase in revenue was attributable to higher recoverable income; however, it was offset by higher property expense, mainly due to higher maintenance cost and the rental loss from Axis Industrial Facility at Rawang (formerly known as Scomi Facility at Rawang) as the tenant has redelivered vacant possession in July 2019.

YTD. Revenue for 9M19 of RM167.1m improved by 12.5% YoY; correspondingly, core net profit of RM85.8m showed an increment of 10.8%. Higher revenue for 9M19 YoY was mainly due to the; (i) commencement of lease on Axis Mega DC (1 June 2018), (ii) commencement of Axis Aerotech Centre at Subang (16 December 2018), (iii) rental from 3 newly acquired properties since the end of 3Q18 and (iv) 3% positive rental reversion has been recognised YTD. Nonetheless, the increment was offset by the increase in property expense and the rental loss from Axis Industrial Facility at Rawang as the tenant has redelivered vacant possession in July 2019. Similarly, Islamic financing cost has also increased due to additional financing facilities utilised to fund new acquisitions.

Occupancy and gearing. Overall occupancy rate remain stable at 92%. Gearing increased to 40% (FY18: 37.3%) following the drawdown to fund the recent acquisitions. We anticipate a fund raising exercise in the near term as Axis REIT has an internal policy of capping gearing at 40%.

Outlook. Axis REIT is still actively pursuing quality acquisitions with focus on Grade A logistics and manufacturing facilities as prime focus. We expect better 4Q19 with full quarter contribution from newly acquired properties (property in Batu Kawan and facilities in Nusajaya) which were completed during third quarter of the year.

Forecast. Although the results were in line, we take this opportunity to include the newly acquired properties into our model: (i) 1 industrial property in Batu Kawan Industrial Park (completed on 23rd July 2019), (ii) 2 manufacturing facilities in Nusajaya, Johor (completed on 30th September 2019). FY19 earnings forecast is cut by 0.9% due to drawdown to fund the recent acquisitions whilst FY20-21 earnings were increased by 0.8% respectively.

Maintain BUY, TP: RM2.03. We maintain BUY with a higher TP of RM2.03 (from RM2.01) to include the newly acquired properties. To note, our valuation is based on 1SD below 2-year historical average yield spread between Axis REIT and 10-year MGS yield in view of increased popularity in industrial properties, high occupant tenancy in its diversified portfolio and also one of the few Shariah compliant REITs.

Source: Hong Leong Investment Bank Research - 22 Oct 2019