9MFY20 realised net income (RNI) of RM92.9m (+3% YoY-Ytd) came in within our and market expectations, at 72% each. 9MFY20 GDPU of 6.50 sen is also within (73%). 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. Maintain FY20-21E CNP of RM129-141m. Maintain MARKET PERFORM and TP of RM2.15.

9MFY20 RNI of RM92.9m came in within our and market expectations, at 72% each. The Group also declared 3QFY20 dividend of 2.25 sen, bringing 9MFY20 dividend to 6.50 sen which also met our FY20 estimate of 8.9 sen at 73%, implying 4.2% gross yield.

Results’ highlights. YoY-Ytd, top-line was up by 3.2% 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 increase in occupancy to 92.7% (from 92.0% in 3QFY19). Lower financing cost (-20%) post the share placement in 4QFY19 which was utilised to pare down borrowings, lowered gearing to 0.32x (from 0.40x pre-placement). All in, RNI increased by 8.3%, but DPU declined by 6.5% due to dilution from the 16.6% placement. QoQ, top-line was up 3%, on slightly higher occupancy of 92.7% (from 92.3%) and stable reversions. This translated to bottom-line increasing by 3.6%.

Outlook. FY20 and FY21 are expected to see minimal leases expiring at 17%/19% of portfolio NLA. The Group is eyeing industrial assets worth a total of RM195m, focussing on Grade A logistics (similar to One Total Logistics warehouse) and well-located retail warehousing suitable for last mile delivery. The Group will continue to target acquisitions with net yield of >6%, while we expect positive low single-digit reversions going forward. Additionally, AXREIT has accepted the LO for 1.5-storey detached factories within Kawasan Perindustrian i-Park, Kulai, Johor for RM28.2m, pending the due diligence which may result in a SPA.

Maintain FY20-21E RNI of RM129.3-140.5m. Our FY20E/FY21E GDPU of 8.9 sen/9.7 sen implies gross yield of 4.2%/4.6%.

Maintain MARKET PERFORM and Target Price of RM2.15 on FY21E GDPU/NDPU of 9.7/8.7 sen and +1.7ppt spread (@ +1SD to the MGS) to a lower 10-year MGS target of 2.80%. Our applied yield spread is at the lower-end among MREITs under our coverage (@ +1.5SD to +2SD) as we favour AXREIT for earnings stability during this pandemic given its exposure to the resilient industrial segment and the nature of its long- term leases in times of uncertainty (WALE of 5.7 years vs. prime retail REITs’ WALE of c.2-3 years). Its low gearing of 0.32x is well positioned to take advantage of acquisition opportunities which may emerge under the challenging market conditions. That said, at current level, FY21E gross yield of 4.6% is below large cap retail/office MREITs’ average of 5.5%.

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 - 22 Oct 2020