Axis REIT reported a moderate set of results – 4Q19 realised net profit of RM29.8m was marginally higher yoy (+0.3%) but up by 6.3% qoq against a low base in 3Q19. Cumulatively, 2019 realised net profit grew by 8.6% yoy on contribution from new assets / leases; realised EPU growth was however slower at +5.7% yoy. Operationally, the results were within market and our expectations; that said, Axis REIT’s 2019 realised EPU came in 3% short of our expectations due to the dilution from new shares. We revised our 2020E and 2021E earnings forecasts by +1.1% and -4.1% respectively after incorporating the acquisitions of RM360m worth of new assets, issuance of new shares in Dec19 and deferment in the commencement of Axis Mega DC 2 to 2022 (from 2021). We have revised our DDM-derived TP to RM1.97 (from RM1.99) after incorporating our earnings changes. Maintain BUY. We continue to like Axis REIT for its industrial / warehouse asset portfolio and attractive 5.4% yield for 2020E.

4Q19 Realised Net Profit Rebounded by 6.3% Qoq

Axis REIT reported a moderate set of results – against a low base in 3Q19, Axis REIT’s 4Q19 realised net profit rebounded by 6.3% qoq to RM29.8m. To recap, Axis REIT’s 3Q19 profitability was affected by the recognition of RM493k of provisions for doubtful / bad debts, partly attributable to Scomi Engineering who vacated the Axis Industrial Facility @ Rawang in July 2019. The REIT has reversed some of the doubtful / bad debts provisions in 4Q19. Axis REIT’s realised EPU had however came in lower qoq due to the dilution from issuance of new shares (+16% to share base) in Dec19; this resulted in a lower 4Q19 DPU of 2.20 sen.

2019 Realised Net Profit Grew by 9% Yoy

Cumulatively, Axis REIT’s 2019 realised net profit came in higher at RM116.2m (+8.6% yoy), driven by contributions from Nestle’s lease at Axis Mega DC (commenced on 1 June 2018) and other newly acquired assets. Full year DPU grew by 5.9% yoy to 9.26 sen, translating to a 12-month trailing yield of 5.2%. Elsewhere, Axis REIT has booked in a record RM101.5m gain from change in fair value of investment properties, largely due to upward revisions for its warehouses / distribution centres.

The Results Were Broadly Within Expectations

The results were broadly within market and our expectations: 2019 realised net profit came in at 99% of the street and our full year earnings forecasts; however, the realised EPU was 3% below our forecasts due to the dilution from the issuance of new shares.

Tweaking 2020E and 2021E EPU by +1.1% and -4.1% Respectively

We have revised our 2020E and 2021E EPU forecasts by +1.1% and -4.1% respectively after incorporating:

(i) the full year 2019 financial statements;

(ii) increase in share base and cash balance after the placement of new shares in Dec19;

(iii) revenue and NPI contributions from the proposed acquisitions of new assets worth RM360m. To recap, Axis REIT has entered into sales and purchase agreements with various parties to acquire 7 properties worth RM244m (2 have since been completed) and accepted 2 letters of offers to acquire properties in Shah Alam and Kota Kinabalu worth RM116m. We have pencilled in an average NPI yield of 7%; and

(iv) Deferment in the commencement of Axis Mega DC 2 to 2022 (from 2021) in view of the slower-than-expected progress in securing new tenant(s).

Maintain BUY With a Revised TP of RM1.97 (from RM1.99)

We have revised our 12-month DDM-derived price target to RM1.97 (from RM1.99) after incorporating our earnings changes. Maintain BUY. We continue to like Axis REIT for its industrial / warehouse asset portfolio, strong management team and attractive 2020E yield of 5.4%. Taking the cue from further compression of 10-year MGS yield after a possible cut in OPR, we anticipate strong investor demand for defensive assets to re-rate high quality MREITs including Axis REIT. Key risks to our view: weaker than expected earnings, unexpected hike in OPR or global bond yields.

Source: Affin Hwang Research - 21 Jan 2020