Axis REIT’s FY22 core net profit of RM157.9m (+15.5% YoY) was within ours and consensus estimates. DPS of 9.75 sen was declared in FY22. Overall improvement was bolstered by newly acquired properties, positive rental reversion and commencement of new tenancies for two of its assets. We remained positive on Axis REIT’s growth prospect, premised on the full year contribution from the assets acquired in 2022 as well as the impending completion of major enhancement works for Axis Facility 2@Bukit Raja and Bukit Raja Distribution Centre 2. Management is also targeting positive rental reversions for its renewal of expiring NLA in FY23. We made adjustments to our forecasts for FY23/24 due to completion of the private placement and assets acquisition exercise. We maintain our BUY call and slightly increase our TP to RM2.00 (from RM1.99).

Results inline. 4QFY22 core net profit of RM36.8m (-5.9% QoQ, +4.4% YoY) took FY22 sum to RM157.9m (+15.5% YoY). The results came in within both ours (102.4%) and consensus (97.6%) expectations. Core net profit was arrived after excluding EIs (fair value change on derivatives) of RM27.8m.

Dividend. FY22: DPU of 9.75 sen vs 9.49 sen SPLY. (4Q22: 2.33 sen vs 4Q21: 2.41 sen)

QoQ. Gross rental income remained largely flattish (-0.5%). Mitigated by slight decrease in property opex (-5.2%), NPI stayed flattish (+0.4%). As non-property expenses grew 11.3% due to higher financing costs (+6.8%), core net profit subsequently fell to RM36.8m (-5.9%).

YoY/YTD. Top line rose by 12.9% YoY and 16.3% YTD, attributed to (i) rental 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 (+12.8% YoY, +16.1% YTD). Despite higher Islamic financing costs (+24.6% YoY, +15.9% YTD) driven by rising OPR as well as additional financing facilities to fund new acquisitions, core net profit expanded +4.4% YoY, +15.5% YTD.

Occupancy and gearing. With 62 properties and 161 tenants, portfolio occupancy stood steadily at 95%, of which 49 properties are fully occupied. Gearing stood at 36% (from FY21: 31%).

Outlook. We look forward to a greater year ahead for Axis REIT, premised on the full year contribution from the assets acquired in 2022 as well as the impending completion of major enhancement works for Axis Facility 2@Bukit Raja and Bukit Raja Distribution Centre 2. Both properties are slated for completion and ready for tenancy in 1Q23 and 3Q23, respectively with enhanced rental rates. Management has also commenced the phase 2 development of Axis Mega Distribution Centre with expected construction cost of RM130m and slated for completion in 1Q24. Despite the uncertain economic outlook, management is targeting positive rental reversions for its renewal of expiring NLA in FY23 (11.2% of total NLA).

Forecast. Although the results are inline with our expectations, we made adjustments to our forecasts for FY23/24 due to completion of the private placement exercise@RM1.75 per unit in early January. This exercise resulted in expansion of share base by 100k units and we expect the RM175m proceeds to yield interest savings of RM4-7m per annum. We also slightly raised our rental assumptions to input rental income arising from the completion of new asset acquisitions. All in, our core net profit forecasts for FY23/24 increased by 6.6%/8.5%. On a net dilution basis, EPU for FY23/24 rose slightly at +0.43%%/+2.29%.

Maintain BUY, TP: RM2.00. We maintain our BUY call and slightly increase our TP to RM2.00 (from 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 and 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 Jan 2023