Axis REIT’s 1HFY22 core net profit of RM82.0m (+23.5%) was within ours and consensus estimates. Dividend of 2.55 sen per unit was declared. Overall improvement was boosted by the 3 newly acquired properties. Occupancy remained high at 96% while gearing increased to 36%. We stay upbeat on 2HFY22’s prospects, backed by its newly acquired properties. We maintain our forecasts, reiterate our BUY call with an unchanged TP of RM2.08. We favour the stock as it is a leading industrial REIT player (93% of its portfolio), earnings resiliency and is one of the very few Shariah compliant REITs.

Within expectations. 2QFY22 core net profit of RM42.9m (+9.7% QoQ, +24.2% YoY) brought 1HFY22’s sum to RM82.0m (+23.5% YoY). Core net profit was arrived after removing EIs (fair value change on derivatives) of RM3.9m. The results were within both ours (53%) and consensus (54%) expectations.

Dividend. Declared 2Q DPU of 2.55 sen, going ex on 2nd Aug 2022 (2Q21: 2.40 sen).

QoQ. Gross rental income increased 8.8%, thanks to contributions from its newly acquired property, DW1 Logistics Warehouse (25 Apr). However, we saw highe r property expenses (+12.8%), mainly due to the uptick in maintenance costs. Hence, net income (NPI) improved by a slightly slower pace of 8.1%. Subsequently, total trust expenses increased (+4.7%) mainly due to increase in Islamic financing costs (to fund new acquisitions) (+19.3%) but was slightly cushioned by lower administrative expenses (-4.2%) and higher interest income (+2.9%). Thus, core net profit increased by +9.7%.

YoY. Top line rose (+20.0%) mainly backed by 3 newly acquired properties; (i) Pasir Gudang Logistics Warehouse 2 (7 Mar) (ii) Indahpura Facility 4 (3 Mar) and (iii) DW1 Logistics Warehouse (25 Apr). In turn, property expenses increased (+22.9%) in line with the new properties. Also, Islamic financing costs increased (+12.2%) due to additional financing facilities to fund new acquisitions. Overall, core net profit increased to RM42.9m (+24.2%).

YTD. Revenue improved (+18.0%) due to the (i) above mentioned 3 newly acquired properties, (ii) commencement of new tenancies at Axis Industrial Facility @ Rawang and D8 Logistics Warehouse, and (iii) positive rental reversion attained. As such, NPI followed the uptick (+18.9%). Despite higher Islamic financing costs (+7.3%) to fund new acquisitions, core net profit increased to RM82.0m (+23.5%).

Occupancy and gearing. With 61 properties and 159 tenants, portfolio occupancy maintained at 96%, of which 50 properties are fully occupied. Gearing increased to 36% (from 1QFY22: 29%)

Outlook. Axis REIT’s estimated its acquisition value target for FY22 at RM120m with focus on: (i) Grade A logistics and manufacturing facilities with long leases from tenants and strong covenants and (ii) well-located retail warehousing in locations ideal for last mile distribution. We remain positive for FY22 with expectations of full year contribution from 5 new acquired properties in FY21 as well as 3 new properties in FY22.

Forecast. We maintain our forecasts as results were in line.

Maintain BUY, TP: RM2.08. We maintain our BUY call with an unchanged TP of RM2.08. To note, our TP is based on FY23 DPU on targeted yield of 4.6% derived from -1SD below 5-year historical average yield spread between Axis REIT and 10Y-MGS, in view of increased popularity in industrial properties (93% of properties on industrial titles), high occupant tenancy in its diversified portfolio, and is also one of the few Shariah compliant REITs.

Source: Hong Leong Investment Bank Research - 21 Jul 2022