1QFY23 core net profit of RM32.4m (-16% YoY) and DPU of 2.05 sen were behind our full-year expectations. We are keeping our MARKET PERFORM call but with a lowered TP of RM1.84 based on a target yield of 5.5% (which implies a 1.0% yield spread above our 10-year MGS yield assumption of 4.5%) on FY24F GDPU.

Results’ highlights. 1QFY23 core net income was below expectations at RM32.4m (-16% YoY), accounting for 19%/18% of our/consensus full year estimate. DPU of 2.05 sen was declared, which represents 20% of our FY23 DPU projection of 10.4 sen. During the quarter, AXREIT completed the issuance of 100.0m new units pursuant to a placement exercise.

The first quarter income’s shortfall was mainly attributable to:

(i) lower occupancy rate of 92.7% (versus 1QFY22’s 96%), partly due to the expiry of one tenancy for Axis Shah Alam Distribution Centre 3 that expired in December 2022,

(ii) increased property expenses arising from higher maintenance costs (bumped up by an one-off building expenses of ~RM2m), which resulted in portfolio efficiency ratio (calculated by dividing property expenses over property income) climbing to 16.5% (from 13.2% in 1QFY22), and

(iii) a provision for doubtful debts of ~RM3.5m made for one lessee at Axis Steel Centre @ SiLC in Johor (although this may be reversed in the subsequent quarters based on past precedent amid ongoing negotiations to recover the outstanding lease income).

Consequently, while top line rose 5% YoY to RM70.5m (partly lifted by incremental rental contributions from newly acquired properties in 2022 and positive rental reversion recorded last year) as property operating expenses was up 32% to RM11.5m, net property income stood relatively flat at RM58.9m (+1% YoY). Meanwhile, financing ratio came in at 33% (versus end-4QFY22 of 36%) following the placement exercise.

Outlook. Following the announcement on the acquisition of three industrial assets valued at RM447.3m last year, comprising: (i) Indahpura Facility 4 (RM16.3m; announced in February 2022), (ii) DW1 Logistics Warehouse (RM390m; announced in April 2022), and (iii) Axis Industrial Facility 1 @ Meru (RM41m; announced in September 2022), AXREIT is targeting further acquisition deals worth RM140m for FY23. In terms of lease expiry profile, 64% of the approximately 1.58m sq ft of space under management (or 12.4% of NLA) up for renewal this year has been renewed to-date with positive rental reversion.

Forecasts update. Post the results, we are adjusting our core net income projections to RM162.7m (-5.8%) for FY23 and RM176.7m (- 1.5%) for FY24. Correspondingly, our GDPU forecasts are tweaked to 9.3 sen and 10.1 sen, respectively, which imply yields of 4.9% and 5.3%.

Reiterate our MARKET PERFORM call. We tweaked our TP to RM1.84 (from RM1.89 previously) based on our target yield of 5.5% (which is derived from a 1.0% yield spread above our 10-year MGS assumption of 4.5%) on FY24F GDPU as we roll forward our valuation window. 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 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 - 19 Apr 2023