Axis REIT’s 9M20 core net profit to RM92.8m (+8.2%) were within ours and consensus estimates. Overall, the improved performance was due to commencement of lease from newly acquired properties. We expect a resilient 4Q20 with contribution from the newly acquired properties. We maintain our forecast; reiterate our BUY call with unchanged TP of RM2.47.

Within expectations. 3QFY20 core net profit of RM31.8m (+2.4% QoQ, +13.7% YoY) brought the 9M20 sum to RM92.8m (+8.2%). The results were within our (75.1%) and consensus expectations (72.1%).

Dividend. Declared 3Q DPU of 2.25 sen, going ex on 4 th Nov 2020 (3QFY19: 2.35 sen). The lower DPU was due to issuance of new units from the equity placement exercise completed in Dec 2019.

QoQ. Revenue was higher (+3.4% QoQ) mainly due to contributions from newly acquired properties and higher carpark income (in 2Q the company gave waiver on season carpark rental for all its multi-tenanted buildings during the MCO). Property expenses was higher by 7.1% due to the enlarged size of the portfolio and also the higher maintenance cost. In turn, core net profit showed an increment of 2.4%.

YoY. Top line rose by 6.0% from the contribution of newly acquired properties. Total properties expenditure rose by 12.0% coming from higher maintenance expenses. However, core net profit increased by 13.7% from the lower Islamic financing cost (- 19.3%).

YTD. Revenue increased by 3.2% due to the commencement newly acquired properties; however, this was offset by the rental loss from Axis Industrial Facility @ Rawang. Property expenditure rose by 11.1% 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 8.2% thanks to lower Islamic financing cost (-20.1%).

Occupancy & gearing. Out of 51 properties, 39 properties enjoyed 100% occupancy. Average portfolio occupancy remained stable at 92.7%; while weighted average lease expiry (WALE) is at 5.7 years. Gearing has increased to 31.9% (from 28.7% in FY19) due to the acquisition of new properties.

Outlook. We believe 4Q20 will remain resilient contributed by the newly acquired properties. Axis’s growth prospect remains promising as the company continues to aggressively source and evaluate potential acquisition targets that are deemed investable. The selection of properties will continue to focus on Grade A logistics facilities and manufacturing facilities with long leases from tenants with strong covenants as well as well-located retail warehousing in locations ideal for last-mile distribution.

Forecast. Maintain as Result 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 diversifi ed 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 - 22 Oct 2020