1QFY22 RNI of RM38.8m came in within our and market expectations at 27% and 26%, respectively, while dividend of 2.42 sen is also within at 25%, of forecasts. AXREIT remains our preferred pick for recording constant strong positive rental reversions throughout the pandemic on healthy occupancy of 96% while downside risks are limited on low lease expiries (22% p.a.). We increase earnings by 6-11% for FY22-23E post housekeeping and to account for the new acquisition. Maintain OUTPERFORM but increase TP to MR2.10 (from RM2.05) as we adjust our 10-year MGS target to 4.15% (from 3.90%).

1QFY22 realised net income (RNI) of RM38.8m came in within our and market expectations, at 27% and 26%, respectively. It also declared dividend of 2.42 sen during the quarter, also within our expectation at 25% of estimate.

Results’ highlights. YoY, top-line was up by 15% on rentals from newly acquired properties during the year and positive rental reversions, and commencement of new tenancies at Axis Industrial Facility @ Rawang and D8 Logistics Warehouse which increased overall occupancy rate to 96% (from 91%). As a result, bottom-line increased by 20.5% as financing cost remained fairly flat post share placement. QoQ, top-line was up by 5.3% on contributions from newly acquired properties. All in CNP was up by 5% despite an increase in expenditure (+54%).

Outlook. FY22-23 is expected to see minimal leases expiring at 22-11% of portfolio NLA. The Group has recently proposed to acquire DW1 Logistics Warehouse, Johor for RM390m and the acquisition is expected to be completed in mid-FY22 with an estimated net yield of 6.5% (below recent acquisitions of 7-8% and below the Group’s portfolio yield of 7.7%), while this is also well within its gearing limit of 0.60x. Going forward, it is eyeing an additional RM120m 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- 7.0%.

Increase FY22-23E RNI to RM152-164m by 6-11% post housekeeping from: (i) improved occupancy on existing assets, (ii) lower financing cost and updated share base post placement, and (iii) new acquisition of DW1 Logistics Warehouse, Johor acquisition. Our FY22-23E GDPU of 9.3-10.2 sen imply gross yield of 5.0-5.4%.

Maintain OUTPERFORM but increase Target Price to RM2.10 (from RM2.05). Our TP is derived post rolling forward our valuation base to FY23E GDPU/NDPU of 10.2/9.2 sen but on a higher 10-year MGS target of 4.15% (from 3.90%) in line with our in-house forward estimates. We continue to like AXREIT’s fundamentals for its: (i) earnings stability during this pandemic from exposure to the resilient industrial segment, (ii) minimal lease expiries (22% 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 0.3x (vs. MREITS’ gearing limit of 0.60x) enabling it to take advantage of potential acquisition opportunities under the challenging market conditions. As such we have applied the thinnest spread under our coverage of +0.8ppt (vs. MREITs under our coverage (+1.1 to +4.5ppt).

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 Apr 2022