9MFY22 net profit of RM121.1m (up 21% YoY) is broadly within our/consensus expectations. Post results, we have tweaked our forecast earnings higher, by 4.1% for FY22 and 2.9% for FY23. Maintain MARKET PERFORM with a revised lower TP of RM1.89 based on a target yield of 5.5% (which implies a 1.0% yield spread above our 10-year MGS assumption of 4.5%).

Results’ highlights. YoY, core net income stood at RM121.1m (up 21% YoY) in 9MFY22, representing 80%/77% of our/consensus full-year expectations. Following the results, AXREIT declared DPU of 2.45 sen in 3QFY22, taking YTD DPU to 7.42 sen (73% of our FY22 estimate). During the 9-month financial period, revenue was up 16% to RM212.3m, lifted mainly by rental income contributions from three newly acquired properties, namely: (i) Pasir Gudang Logistics Warehouse 2 (since March 2022), (ii) Indahpura Facility 4 (since March 2022), and (iii) DW1 Logistics Warehouse (since April 2022). Rising in tandem was property expenses totalling RM29.2m (+19%) as portfolio efficiency ratio (calculated in terms of property expenses divided by property income) inched up to 13.9% (compared with 9MFY21’s 13.7%). Meanwhile, overall portfolio occupancy rate nudged down marginally to 95% as of end-September 2022 (versus 96% end-June 2022) due to major enhancement works currently undertaken at Axis Facility 2 @ Bukit Raja (scheduled to be completed in January 2023).

Outlook. YTD, AXREIT has announced the acquisitions of three industrial assets valued at RM447.3m, comprising: (i) Indahpura Facility 4 (RM16.3m; announced in February 2022), (ii) DW1 Logistics Warehouse (RM390m; announced in April 2022), and (iii) a manufacturing facility in Klang (RM41m; announced in September 2022). It is currently eyeing fresh acquisition targets worth RM120m (likely to materialise in early 2023). In terms of lease expiry profile, approximately 2.5m sq ft of space under management (representing 20% of total net lettable area) is up for renewal this year, of which 67% has been renewed to-date with a positive rental reversion (percentage rate not disclosed).

Tweaking our forecasts. Post the results, we have adjusted our core net income projections to RM157.9m (+4.1%) for FY22 and RM171.5m (+2.9%) for FY23 after tweaking our assumptions. Correspondingly, our GDPU forecasts are revised to 9.6 sen (from 9.3 sen) and 10.4 sen (from 10.2 sen), respectively. This implies yields of 5.2%-5.7%.

MARKET PERFORM call maintained. We have lowered our TP slightly to RM1.89 (from RM1.95) after streamlining our target yield (from 5.3% previously) to 5.5% (which is derived from a 1.0% yield spread above our 10-year MGS assumption of 4.5%) on FY23F GDPU. This is to reflect AXREIT’s diversified portfolio of industrial assets (spread across various asset types such as logistic warehouse, manufacturing facilities, business parks and hypermarkets), offering a steady income stream. There is no adjustment to our TP based on ESG of which it is given a 3- star rating as appraised by us.

Risks to our call include: (i) expansion / contraction in risk-free rate / bond yield, (ii) higher / lower-than-expected rental reversions, and (iii) higher / lower-than-expected occupancy rates.

Source: Kenanga Research - 20 Oct 2022