2QFY21 RNI of RM63.1m came in within our and market expectations at 45% each, while dividend of 4.63 sen is also within at 48%. Occupancy is healthy at 94%, with minimal lease expiries (18% p.a.) of which it has locked in 83% of the expiring leases. Valuation-wise, we applied the lowest spread under our coverage at +1.0ppt due to AXREIT’s earnings stability, positive reversions and industrial space resiliency throughout the pandemic. Maintain OUTPERFORM and TP of RM2.15 on FY22E GDPU of 9.9 sen.

2QFY21 realised net income (RNI) of RM63.1m came in within our and market expectations, at 45% each. The Group also declared 2QFY21 dividend of 2.40 sen (of which 1.89 sen is taxable and 0.51 sen is non-taxable), bringing 1HFY21 dividend to 4.63 sen which also met our FY21 estimate of 9.7 sen at 48%, implying 5.0% gross yield.

Results’ highlights. QoQ, top-line was up by 5.3% on full quarter contributions from four newly acquired properties in 1QFY21. However, RNI declined by 4.1%, mainly due to a RM3.5m provision for doubtful debts from a tenant (Yongnam Engineering Sdn Bhd), and higher financing cost (+8.4%) as a result of the recent acquisitions. Net gearing remained stable at 0.36x (vs. 0.36x in 1QFY21). YoY-Ytd, top-line was up by 5.6% on rentals from seven newly acquired properties over the year, while operating cost only increased marginally by 1.8%. However, higher expenditure (+24.6%) due to the provision of doubtful debt and higher financing cost (+11.0%) weighed on RNI which inched up 3.1%.

Outlook. FY21 is expected to see minimal leases expiring at 18% of portfolio NLA, of which the Group has already secured renewals for 83% of these leases (vs. 32% in 4QFY20) on positive reversions, while FY22 will see 21% of leases up for expiry. In the near term, the Group is actively eyeing industrial assets worth a total of RM135m, focusing on Grade A logistics located in Selangor, Penang and Johor and will continue to target acquisitions with net yield of >6%.

Maintain FY21-22E RNI of RM140.5-142.8m which will be driven by single-digit positive reversions, gradual improvement in occupancy to 94- 95% in FY21-22 (from 91% in 1QFY21) and positive contributions from acquisitions completed in 1QFY21. Our FY21-22E GDPU of 9.7-9.9 sen imply gross yield of 5.0-5.1%.

Maintain OUTPERFORM and Target Price of RM2.15 on FY22E GDPU/NDPU of 9.9/8.9 sen on an unchanged +1.0ppt spread, at historical average SD, to the 10-year MGS target of 3.60%. Our applied yield spread is at the lower-end among MREITs under our coverage (averaging +0.5SD) due to its portfolio resiliency. AXREIT is our preferred pick for its: (i) earnings stability during this pandemic given its exposure to the resilient industrial segment, (ii) minimal lease expiries (<18% of portfolio p.a.) which is mostly secured, (iii) long-term leases during these uncertain times (WALE of 5.7 years vs. prime retail REITs’ WALE of c.2-3 years), and (iv) low gearing of 0.36x (vs. MREITS’ gearing limit of 0.60x) well positioned to take advantage of acquisition opportunities which may emerge under the challenging market conditions.

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 Jul 2021