We came away from the conference call feeling reassured of industrial-based AXREIT’s earnings stability as most of its tenants remained in operations during the MCO period, while the Group does not expect lower rental as there is no force majeure clause for tenants. However, there may be rental deferments on a case to case basis. Increase FY20- 21E CNP by 6-2% to RM129-138m. Upgrade to MARKET PERFORM (from UP) on a higher TP of RM1.90 (from RM1.55), translating to implied yield of 4.7% for FY20.

There was no loss of rental during the MCO period, only rental deferments. Given the business nature of AXREIT tenants which are in industrial/office space, AXREIT stands in better stead compared to retail and hospitality MREITs as most manufacturing tenants remained in operations during the MCO period from March to May 2020. Channel checks with management suggested that all top 10 tenants that make up 46.6% of portfolio revenue were in operations during the MCO. Furthermore, all of AXREIT’s 150 tenancies have no allowance for tenant to ask for discount (no force majeure clause). However, the Group will consider rental deferment on a case-to-case basis for struggling tenants, but the percentage of rental deferment during the March-May 2020 MCO phase has been minimal at this juncture.

Portfolio outlook remains stable, for now. Tenant retention remains stable currently with occupancy remaining close to current level of 92% (as in FY19A). Management believes most tenants prefer to stay put under current circumstances and expect decent rental reversions of c.2% in FY20 (similar to FY19A reversions). However, we caution that current expectations of reversions are still dependent on the extent of the MCO and impact of Covid-19 on tenants.

Strong arsenal to pounce on acquisition opportunities. The Group is seeing more targets for acquisition coming up as companies may favour an asset light model (i.e. sale and lease back) in light of Covid- 19, but they have yet to see any significant increase in cap rates and is still targeting 7% net yields on future acquisitions. Group gearing remains low at 0.29x currently (from 0.40x in 3Q19) post the recent 16% private placement to pare down borrowings. Going forward, management could easily gear up by its capex amount of RM135m (management guided they would utilise 100% short-term borrowings), which by our assumptions would only increase gearing up to 0.33x from current levels, which is low compared to REITs maximum gearing limit of 0.50x, implying that AXREIT could borrow an additional RM1.1b before hitting its maximum gearing limit).

Increase FY20-21E RNI marginally by 6-2% to RM129-138m (refer overleaf). Our FY20-21E GDPU of 8.9-9.5 sen imply gross/net yields of 4.6-4.9%/4.1-4.4%.

Upgrade to MARKET PERFORM (from UP) on a higher Target Price of RM1.90 (from RM1.55) on higher FY21E GDPU/NDPU of 9.5 sen/8.6 sen (from 9.4 sen/8.5 sen), a lower spread of +1.7ppt (@ +1SD to the MGS) from +2.5ppt (@ +2SD) and lower 10-year MGS target of 3.30% (vs. 3.70% previously). Our applied yield spread is at the lower end among MREITs under our coverage (@ +2SD) as we favour AXREIT for earnings stability during this pandemic given its exposure to the most resilient segment among MREITs, and the nature of its long term leases (WALE of 6 years vs. prime retail REITs’ WALE of c.2-3 years). Additionally, given its gearing headroom, we believe AXREIT is well positioned for acquisition opportunity for favourable assets which may surface in the market.

Risks to our call include: (i) bond yield expansion vs. our target 10- year MGS yield, and (ii) weaker-than-expected rental income.

Source: Kenanga Research - 8 May 2020