3Q19 Earnings Miss

Axis REIT reported a weak set of results – 3Q19 realised net profit slipped by 3% qoq (-4% yoy) to RM28m due to higher maintenance costs, termination of a lease at its Rawang facility and the recognition of RM493k of doubtful debts. Cumulatively, 9M19 realised net profit grew by 11% yoy on contributions from new assets / leases, translating to higher DPU of 7.06 sen (+12% yoy). However, the results fell short of market and our expectations due to the revenue miss and higher-thanexpected costs. We cut our 2019-21E earnings forecasts by 4-5% and lower our DDM-derived TP to RM1.99. Notwithstanding the earnings hiccups, we reiterate our BUY rating for Axis REIT. We continue to like Axis REIT for its industrial / warehouse asset portfolio, attractive 5.3% yield for 2020E and strong acquisition pipeline.

3Q19 Realised Net Profit Slipped by 3% Qoq to RM28m (-4% Yoy)

Axis REIT reported a weak set of results – 3Q19 realised net profit slipped by 3.2% qoq to RM28m due to lower revenue, higher maintenance costs and the recognition of RM493k of provisions for doubtful / bad debts. Notably, Scomi Engineering vacated the Axis Industrial Facility @ Rawang in July 2019. To recap, Axis REIT had in 2016 acquired the property from Scomi for RM42m and leased back the properties for RM3.4m p.a. Despite the earnings slip, the quarterly DPU was relatively stable at 2.35 sen.

9M19 Earnings Came in Higher, But Short of Expectations

Cumulatively, Axis REIT’s 9M19 realised net profit came in higher at RM85.8m (+10.9% yoy), driven by contributions from Nestle’s lease at Axis Mega DC (commenced on 1 June 2018) and other newly acquired assets. At 70-71% of the street and our full-year earnings forecasts, Axis REIT’s 9M19 results were below market and our expectations. The earnings miss was attributable to the termination of Scomi Engineering lease, weakerthan-expected revenue growth (Axis REIT has saw higher office occupancy but at a lower rental psf) and higher-than-expected maintenance costs.

Cutting 2019-21E EPU Forecasts by 4-5%

We are lowering our 2019-21 EPU forecasts by 4-5% after incorporating: (i) a 2.5-year vacancy (from July 2019 to December 2021) for the Axis Industrial Facility @ Rawang; (ii) lower average rental for office; and (iii) higher maintenance costs. Also, we are lowering our 2019-21E DPU forecasts by 4-5%%, based on a 100% payout ratio.

Source: Affin Hwang Research - 22 Oct 2019