Axis REIT’s 1QFY20 core net profit of RM29.9m (+1.7% QoQ, +3.5% YoY) were within ours and consensus expectations. Dividend of 2.10 sen per unit was declared. The improvement was primarily supported by revenue contribution from newly acquired assets. Overall, Axis remains relatively stable and defensive amid the Covid-19 outbreak and MCO given their well-diversified portfolio (focusing on industrial properties, with a large number of tenants offering essential services). We expect a better 2QFY20 with full quarter revenue contribution from the newly acquired properties. We maintain our forecast; reiterate our BUY call with unchanged TP of RM2.47.

Within expectations. 1QFY20 core net profit of RM29.9m (+1.7% QoQ, +3.5% YoY) were within our and consensus expectations, accounting for 23-24% of respective full year forecasts. The results were within estimates as we see Axis REIT to remain relatively resilient amid Covid-19 and MCO/CMCO, thanks to their well-diversified portfolio (focusing on industrial properties, with a large number of tenants offering essential services).

Dividend. Declared 1Q DPU of 2.10 sen, going ex on 4th June 2020 (1QFY19: 2.35 sen). The DPU of 2.10 sen is lower than 1QFY19 of 2.35 sen due to issuance of new units from the equity placement exercise completed in December 2019.

QoQ. Revenue was a tad higher (+1.9% QoQ) due to the commencement of lease on Axis Facility @ Batu Kawan on 1 March 2020. Manager’s fee (+10.6%) and trustee’s fee (+18.5%) also increased; however, these were slightly mitigated by lower Islamic financing cost (-17.1%), coming from the equity placement exercise in 4QFY19 and the recent OPR cuts in January and March 2020. As a result, core net profit ticked up by 1.7% to RM29.9m.

YoY. Top line remained flat (+0.1%) as the commencement of lease on Axis Facility @ Batu Kawan and rental from 4 newly acquired properties completed since end of 3Q2019 was offset the rental loss from Axis Industrial Facility @ Rawang. Property expenditure rose by 9.4% mainly due to the increase in building maintenance expenses and cost incurred from new properties added to the portfolio; these in turn brought down net property income (NPI) by 1.3%. Nonetheless, bottom line increased by 3.5% thanks to lower Islamic financing cost (-19.5%).

Occupancy & gearing. Out of 50 properties, 38 properties enjoyed 100% occupancy. Average portfolio occupancy remained stable at 92.5%; while weighted average lease expiry (WALE) is at 5.8 years. Gearing inched up to 29.6% (from 28.7% in FY19).

Outlook. We expect a better 2QFY20 with full quarter revenue contribution from the commencement of lease on Axis Facility @ Batu Kawan and two other properties (Axis Facility 2 @ Nilai and Axis Facility 2 @ Bukit Raja). We also anticipate the pipeline assets from FY19 that have not been acquired (manufacturing facility in Shah Alam and Kota Kinabalu, Sabah) will contribute positively to the company once they are absorbed into the portfolio (targeting to do so by 1HFY20).

Forecast. Maintain as Results Were Inline.

Maintain BUY, TP: RM2.47. We maintain our BUY call with an unchanged TP of RM2.47. To note, our valuation is derived from 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 is also one of the few Shariah compliant REITs.

Source: Hong Leong Investment Bank Research - 21 May 2020