1QFY20 realised net income (RNI) of RM29.9m (+0.1% YoY) came in within our and market expectations at 23%, each. 1QFY20 GDPU of 2.10 sen is also within (24%). Rental collections for AXREIT have been relatively stable during this trying time, save for some deferments for struggling tenants. Maintain FY20E/FY21E CNP of RM129m/RM138m. Maintain MP and TP of RM1.90 (with an implied FY21E yield of 5.0%).

1QFY20 RNI of RM29.9m came in well within our and market expectations, at 23% each. The Group also declared 1QFY20 dividend of 2.10 sen which also met our FY20 estimate of 8.9 sen at 24%, implying 4.6% gross yield.

Results’ highlights. YoY, top-line was flattish at +0.1% likely on contributions from newly acquired properties, namely: (i) Upeca Aerotech Sdn Bhd (handover in Feb 2019), and (ii) two industrial properties in Johor in 3Q19, although occupancy declined marginally to 92.5% (from 94.0% in 1Q19). All in, RNI was up by 3.5% on lower financing cost (-19.5%) post the placement in 4Q19. QoQ, top-line was fairly stable, up 1.9% on occupancy improvements (+0.5ppt) and low single-digit reversions. Lower financing cost (-17%) allowed RNI to increase by 1.7%. However, EPU declined by 5.9% on increased units post the placement and IDRP. Gearing remains low at 0.30x vs. MREITS’ maximum limit of 0.50x.

Outlook. FY20/FY21 is expected to see minimal leases expiring at 17%/16% of portfolio NLA. The Group is eyeing industrial assets worth a total of RM135m, namely the Kota Kinabalu asset, and Shah Alam asset, and a manufacturing facility in Bayan Lepas, Penang, which is pending completion post the MCO as well as a manufacturing facility in Johor, all to be financed by internal funds given that gearing is currently low at 0.30x post the placement.

Maintain FY20-21E RNI of RM129-138m. To recap, we have only trimmed FY20E CNP by 4.7% to RM128.8m in our previous report, to account for possible rental deferments from tenants, while FY21E CNP is unchanged at RM137.8m. Our FY20E/FY21E GDPU of 8.9 sen/9.5 sen implies gross yield of 4.6%/4.9%. That said, we will continue to monitor developments in coming months given the unprecedented fluidity of the pandemic situation. We reiterate our cautious view that prolonged business disruptions may cause more tenants to seek rental deferments.

Maintain MARKET PERFORM and Target Price of RM1.90 on FY21E GDPU/NDPU of 9.5 sen/8.6 sen and +1.7ppt spread (@ +1SD to the MGS) on our 10-year MGS target of 3.30%. 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 5.8 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. At current level, FY21E gross yield of 4.9% is below large cap retail/office MREITs’ average of 5.6%.

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 - 21 May 2020