FY21 RNI of RM137.4m came in within our and market expectations at 98% and 100%, respectively, while dividend of 9.49 sen is also as anticipated at 98% payout. AXREIT remains our TOP PICK for recording constant strong positive rental reversions throughout the pandemic while occupancy remained healthy at 96%. Downside risks are limited on low lease expiries (24% p.a.). For its stability, AXREIT is awarded the thinnest spread under our coverage at +1.0ppt. Maintain OUTPERFORM and but with a marginally lower TP of MR2.05 (from RM2.15) as we adjust our 10-year MGS target to 3.90% (from 3.60%).

FY21 realised net income (RNI) of RM137.4m came in within our and market expectations, at 98% and 100%, respectively. The Group also declared dividend of 2.41 sen during the quarter, bringing FY21 dividend to 9.49 sen which also met our FY21 estimate of 9.7 sen at 98%, implying 5.2% gross yield.

Results’ highlights. YoY, FY21 top-line was up by 6% on rentals from five newly acquired properties during the year and positive rental reversions, while operating cost decreased slightly (-1.2%). All in, FY21 CNP was up by 9.4% despite higher financing cost (+16%) and expenditure (+1.6%). QoQ, 4QFY21 top-line was up marginally by 1.9% on improving portfolio occupancy of 96% (vs. 94%) and low single-digit reversions. However, RNI was down slightly by 1.2% on slightly higher operating cost (+8.8%) due to higher maintenance cost. Net gearing reduced to 0.31x (vs. 0.36x in 3QFY21) post placement.

Outlook. FY22 is expected to see minimal leases expiring at 24% of portfolio NLA. The Group has recently accepted a LO (Letter of Offer) for a manufacturing facility within Kawasan Perindustrian i-Park, Johor for RM16.3m. Going forward, it is eyeing a total of RM400m worth of industrial assets acquisitions, focusing on Grade A logistics located in Selangor, Penang and Johor and will continue to target acquisitions with net yield of c.6.5%.

Maintain FY22E RNI of RM142.8m and introduce FY23 RNI of RM148.0 which will be driven by single-digit positive reversions, stable occupancy, and positive contributions from acquisitions completed in FY21. Our FY22-23E GDPU of 9.9-10.2 sen imply gross yield of 5.4- 5.6%.

Maintain OUTPERFORM but with a slightly lower Target Price of RM2.05 (from RM2.15). Our TP is based on an unchanged FY22E GDPU/NDPU of 9.9/8.9 sen and +1.0ppt spread which is at historical average SD to the 10-year MGS. However, we increase our 10-year MGS target to 3.90% (from 3.60%), in line with our in-house estimates. Our applied yield spread is the thinnest among MREITs under our coverage (+1.1 to +4.5ppt) on AXREIT’s portfolio resiliency due to its heavy exposure to the resilient industrial segment. Even post lowering our TP, we continue to like AXREIT for its: (i) earnings stability during this pandemic from exposure to the resilient industrial segment, (ii) minimal lease expiries (24% of portfolio p.a.) in FY22, (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 position of 0.31x (vs. MREITS’ gearing limit of 0.60x) enabling it to take advantage of potential acquisition opportunities 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 - 21 Jan 2022