Axis REIT’s 9MFY22 core net profit of RM121.1m (+19.3% YoY) was within ours and consensus estimates. DPS of 2.45sen was declared. Overall improvement was bolstered by newly acquired properties, positive rental reversion and commencement of new tenancies for two of its assets. We remain positive on Axis REIT’s growth prospect, backed by its strong pipeline of asset enhancement initiatives and acquisitions, alongside an overall positive rental reversion from its tenancies amidst times of uncertainties. We maintain our forecasts, reaffirm BUY call with an unchanged TP of RM1.99.

Results inline. 3QFY22 core net profit of RM39.1m (-8.8% QoQ, +11.5% YoY) took 9MFY22’s sum to RM121.1m (+19.3% YoY). The results came in within both ours (78.5%) and consensus (76.5%) expectations. Core net profit was arrived after excluding EIs (fair value change on derivatives) of RM5.0m.

Dividend. Declared DPU of 7.42 sen/unit YTD vs 7.08 sen/unit SPLY. (3Q22: 2.45sen/unit, ex-date: 2 Nov 2022)

QoQ. Gross rental income remained largely flattish (-1.1%). However, we saw higher property expenses (+6.4%), owing to higher maintenance costs for its properties, which led to a slight decline in NPI (-2.3%). Meanwhile, as non-property expenses grew 12.0% due to higher financing costs (+14.4%), core net profit subsequently fell to RM39.1m (-8.8%).

YoY/YTD. Gross rental income rose by 16.4% YoY and 17.5% YTD, fuelled by (i) rental contribution from newly acquired properties, (ii) commencement of new tenancies at Axis Industrial Facility @ Rawang and D8 Logistics Warehouse, (iii) positive rental reversions and (iv) sales of recycle materials arising from demolition work at Bukit Raja Distribution Centre 2. In turn, NPI followed the uptick (+14.0% YoY, +17.2% YTD). Despite higher Islamic financing costs driven by rising OPR as well as additional financing facilities to fund new acquisitions, core net profit expanded to RM121.1m (+11.5% YoY, +19.3% YTD).

Occupancy and gearing. With 61 properties and 156 tenants, portfolio occupancy stood steadily at 95%, of which 48 properties are fully occupied. Gearing increased to 36% (from FY21: 31%).

Outlook. We believe Axis REIT will continue posting decent YoY growth, especially with the imminent completion of major asset enhancement works for Axis Facility 2 @ Bukit Raja and Bukit Raja Distribution Centre 2. Both are slated for completion and ready for tenancy in 1Q23 and 3Q23, respectively with enhanced rental rate. Despite the ongoing macroeconomic woes, we gathered from the management that demand for industrial properties remain sturdy while overall YTD rental reversion has been positive thus far. However, we expect sequential increase in financing costs due to the prevailing interest rate upcycle (49% fixed rate financing), though the quantum is not expected to materially impact its bottom line.

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

Maintain BUY, TP: RM1,99. We maintain our BUY call with an unchanged TP of RM1.99. To note, our TP is based on FY23 DPU on targeted yield of 4.8% derived from -1SD below 5-year historical average yield spread between Axis REIT and 10Y MGS, in view of its robust track record, occupant tenancy in its diversified portfolio, resilience amidst tough times, as reflected by their performance at the height of the Covid-19 pandemic. Also, it is also one of the few Shariah compliant REITs.

Source: Hong Leong Investment Bank Research - 20 Oct 2022