Axis REIT’s 1H20 core net profit of RM61.0m (+5.5%) were within ours and consensus estimates. Overall, the improved performance was due to commencement of lease from newly acquired properties. We expect a better 2H20 with full contribution from the newly acquired properties. On separate note, Axis has proposed to acquire a yield accretive warehouse for a cash consideration of RM95m. We estimate that the asset will contribute about 2% to our FY21-FY22 forecasts. We maintain our forecast pending completion of acquisition; reiterate our BUY call with unchanged TP of RM2.47.

Within expectations. 2QFY20 core net profit of RM31.1m (+4.0% QoQ, +7.4% YoY) brought up 1H20 core net profit to RM61.0m (+5.5%). The results were within our (49.3%) and consensus expectations (47.3%).

Dividend. Declared 2Q DPU of 2.15 sen, going ex on 9th Sept 2020 (2QFY19: 2.36 sen). The lower DPU was due to issuance of new units from the equity placement exercise completed in December 2019.

QoQ. Revenue was a tad higher (+1.2% QoQ) due to contribution on newly acquired properties. Net profit increased by 4% coming from flattish total property expenditure (+0%) and lower total trust expense (-2.9%).

YoY. Top line rose by 3.7% as the commencement of lease on Axis Facility @ Batu Kawan and rental from 5 newly acquired properties completed since end of 3Q2019 was offset the rental loss from Axis Industrial Facility @ Rawang. Property expenditure rose by 11.8% mainly due to the enlarged size of the portfolio and also building maintenance expenses (caused by the collapse of a retaining wall along Sungai Penchala that damaged the driveway at Axis Vista and Axis Technology Centre). Nonetheless, bottom line increased by 7.4% thanks to lower Islamic financing cost (- 21.5%).

YTD. Revenue ticked up by 1.9% contributed from newly acquired properties as mentioned above. Net profit increase by 5.5% thanks to lower total trust expense (- 6.9%) and flattish total property expenditure (+0.5%)

New acquisition on card. On separate announcement, Axis REIT has proposed to acquire a warehouse (located within Seksyen 15 Shah Alam) for a total lump sum cash consideration of RM95.0m from Axis Development Sdn. Bhd. (to be funded by existing credit lines). The property has a 100% occupancy rate as at 26 Aug 2020 and the proposal is expected to be completed by year end. Upon completion, the property with a net lettable area of 285k sqft shall be leased to One Total Logistics (M) Sdn Bhd (current tenant) which has remaining fixed tenancy period that expires on 30 June 2023. The rental rate is at RM513k per month.

Positive on acquisition. We are positive on the acquisition as it is yield accretive, given the net property income yield close to 6.5% (vs its current NPI yield of 6%). We estimate that the new asset will contribute about 2% for FY21-FY22 forecasts. Gearing ratio is expected to increase to 30.9% from 28.7% (FY19), which is below the gearing limit of 60% prescribed by the Securities Commission Malaysia.

Outlook. We expect a better 2H20 contributed from the newly acquired properties. Management also has shared new properties in the pipeline (Figure 4&5) that will contribute positively into Axis’s earnings moving forward.

Forecast. Maintain our forecast for now pending completion of acquisition.

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. The stock also has shown resilient earnings throughout the pandemic.

Source: Hong Leong Investment Bank Research - 27 Aug 2020