1HFY20 realised net income (RNI) of RM60.8m (+5% YoY) came in within our and market expectations, at 47% each. 1HFY20 GDPU of 4.25 sen is also within (48%). AXREIT’s industrial segment remained highly resilient during the MCO period compared with other MREITs and as such we expect stable occupancy on low single-digit reversions. Increase FY20E/FY21E CNP by 0.4-1.9% post the acquisition of a RM95m industrial facility in Shah Alam yesterday. Maintain MP but with a higher TP of RM2.15 (from RM1.90) on increased earnings and lower MGS target of 2.8%.

1HFY20 RNI of RM60.8m came in within our and market expectations, at 47% each. The Group also declared 2QFY20 dividend of 2.15 sen, bringing 1H20 dividend to 4.25 sen which also met our FY20 estimate of 8.9 sen at 48%, implying 4.2% gross yield.

Results’ highlights. YoY-Ytd, top-line was up by 2% on contributions from newly acquired properties, namely: (i) Upeca Aerotech Sdn Bhd (handover in Feb 2019), and (ii) two industrial properties in Johor in 3QFY19; and mild positive rental reversions despite occupancy declining marginally to 92.3% (from 95.0% in 2QFY19). Financing cost declined by 20% post the placement in 4QFY19 which was used to pare down borrowings, lowering gearing to 0.31x (from 0.40x pre-placement), resulting in RNI increasing by 5%. However, DPU is down by 9.8% due to dilution from the 16.6% placement. QoQ, top-line was fairly stable, up 1.2% on low single-digit reversions despite slightly lower occupancy of 92.3% (from 92.5%). However, RNI was up by 3.6% on flat operating cost, and lower expenditure (-6.5%).

Proposed to acquire an industrial facility in Shah Alam for RM95m. The tenant is One Total Logistics (M) Sdn Bhd, a heavy transportation, freight forwarding company which will be the single tenant occupying 100% of the space. The net yield of the acquisition is 6.5% which we deem as fair as recent acquisitions were at between 6-7% net yield. The acquisition will be funded by internal funds and is expected to be completed by 4QFY20, contributing 1.9% to FY21E CNP and increasing gearing to 0.32x (from 0.30x).

Outlook. FY20/FY21 are expected to see minimal leases expiring at 17%/18% of portfolio NLA. The Group is eyeing industrial assets worth a total of RM120m, focussing on Grade A logistics (similar to One Total Logistics warehouse) and retail warehousing in Selangor, Penang and Johor. The Group will continue to target acquisitions with net yield of >6%, while we expect positive low single-digit reversions going forward.

Increase FY20-21E RNI by 0.4-1.9% to RM129.3-140.5m post the recent acquisition. Our FY20E/FY21E GDPU of 8.9 sen/9.7 sen implies gross yield of 4.2%/4.6%.

Maintain MARKET PERFORM and increase Target Price to RM2.15 (from RM1.90) upon a slightly higher FY21E GDPU/NDPU of 9.7/8.7 sen (from 9.5 sen/8.6 sen) and +1.7ppt spread (@ +1SD to the MGS) to a lower 10-year MGS target of 2.80% (from 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 5.7 years vs. prime retail REITs’ WALE of c.2-3 years). Additionally, given its gearing headroom, we believe AXREIT is well positioned for acquisition opportunities for favourable assets which may surface in the market. At current level, FY21E gross yield of 4.6% is below large cap retail/office MREITs’ average of 5.8%.

Source: Kenanga Research - 27 Aug 2020