Axis REIT reported a modest set of results – 1Q20 realised net profit grew by 3.5% yoy to RM29.9m on the back of a higher revenue (+1.8% yoy) and lower finance costs. The 1Q20 realised EPU and DPU had however declined by 10.6%/10.7% yoy due to a 16.6% increase in the share base arising from the placement exercise completed in 4Q19. Overall, the results were broadly within consensus and our expectations. We raised our 2021-22E EPU forecasts by 1.7% after incorporating a lower finance cost following BNM’s recent rate cut. We rolled forward our valuation horizon and raised our price target to RM1.80 (from RM1.72). Maintain HOLD. At a 4.9% 2021E yield, Axis REIT is trading at 1 SD above its 8-year average yield and looks fair to us, considering its relatively stable earnings outlook.

1Q20 Realised Net Profit Grew by 3.5% Yoy

Axis REIT’s 1Q20 realised net profit grew by 3.5% yoy to RM29.9m on the back of a higher revenue (+1.8% yoy) and lower finance costs (-19.5% yoy). The increase in revenue was due to commencement of several new leases between 3Q19-1Q20 which more than offset the rental loss from Axis Industrial Facility @ Rawang (previously leased to Scomi Engineering). The lower finance costs were due to a reduced gearing after the equity placement exercise in 4Q19 and BNM OPR cuts in Jan20 and Mar20.

Realised EPU and DPU Have Slipped on Higher Share Base

Axis REIT’s 1Q20 realised earnings per unit (EPU) had however come in lower yoy (-10.7%) due to the dilution on the issuance of new units (+16% to share base) in December 2019 arising from a share placement. Axis REIT had also issued 7.08m new units in Mar20 pursuant to the IDRP applicable to the 2019 final income distribution. Given the lower realised EPU, management has declared a lower 1Q20 income distribution of 2.10 sen (1Q19: 2.35 sen).

Results Were Broadly Within Expectations

While Axis REIT’s 1Q20 realised net profit only accounted for 22-23% of the street’s and our full-year earnings forecasts, we deem the results as in line. We expect the REIT to report higher earnings in the coming quarters driven by rental contributions from three new properties that were acquired or had commenced in 1Q20 and another five properties for which the group has signed the acquisition agreements but completion is pending.

Raising 2021-22E EPU Forecasts on Lower Finance Costs

We maintain our revenue and NPI forecasts but raised our 2021-22E EPU forecasts by 1.7% after incorporating a 20 bps reduction in its finance costs. To recap, BNM had cut Malaysia’s Overnight Policy Rate by 50 bps on 5th May to 2.00%. The cut was steeper than our expectation of a 25 bps cut.

Maintain HOLD With a Higher DDM-derived Price Target of RM1.80

We maintain our HOLD rating on Axis REIT with a higher DDM-derived 12- month target price of RM1.80 (from RM1.72) after incorporating our earnings upgrade and rolling forward our valuation horizon. At a 4.9% 2021E distribution yield, Axis REIT is trading at 1 standard deviation above its 8-year average yield of 5.5%, and looks fair to us considering its relatively stable earnings outlook. Upside risk: strong earnings driven by robust demand for industrial / logistic assets; downside risks include weaker-than-expected earnings due to lower rentals / offering of rental rebates and unexpected spikes in global bond yields.

Source: Affin Hwang Research - 22 May 2020