AXREIT’s 1HFY23 core net profit was below expectations as we had overestimated the group’s top line, no thanks to a drag from the termination of certain tenants. AXREIT looks to fortify its portfolio with the help of upcoming logistics and warehouse assets. Still, it may require some time for the group to make up for some lost tenants, hence we are cutting our FY23F/FY24F earnings by 16%/6%. Downgrade to UP (from MP) on a lower TP of RM1.55 (from RM1.84) at a target yield of 5.5%.

Behind expectations. 1HFY23 net profit of RM65.2m was below expectations, accounting for 41% of both our full-year forecast and consensus full-year estimate. The negative deviation is likely attributed to softer-than-expected occupancy rates from the termination of lease agreement of certain accounts. Meanwhile, a distribution per unit of 2.05 sen (YTD: 4.10 sen) is also a miss from our FY23F expectations of 9.30 sen due to the lower earnings.

YoY, 1HFY23 gross revenue fell slightly by 1% as a decline in occupancy rate (89.0%, -7.0ppt) was mainly offset by positive rental reversion during the period. Aside from higher operating expenses owing to a larger building portfolio, the group also incurred higher provision of doubtful debts (YTD: RM5.2m from Axis Steel Centre @ SILC, Johor) and higher financing cost. Collectively, this drove 1HFY23’s distributable income and core net profit to RM72.3m (-12%) and RM66.1m (-19%), respectively.

Outlook. Having undergone a recent shortfall in tenant occupancy, AXREIT looks to capitalise on upcoming developments to bolster its earnings. These include an upcoming warehouse with ancillary buildings project for SPX Xpress (fka Shopee Express) and the under construction Axis Mega Distribution Centre (Phase 2). The group is also planning the acquisition of a logistics warehouse in Kulim to expand its coverage in Kedah. With regards to the vacant possession from the terminated lease, the group is optimistic in sourcing a new tenant and would be able to accommodate industrial clients if needed.

Forecasts. Post-results, we cut our FY23F/FY24F by 16%/6% as we account for softer rental revenues. We are conservative with 2HFY23’s performance in anticipation of a prolonged time needed to uplift its occupancy ratio.

Downgrade to UNDERPERFORM (from MARKET PERFORM) with a lower TP of RM1.55 (from RM1.84). While we maintain our target yield of 5.5% (derived from a 1.0% yield spread above our 10-year MGS assumption of 4.5%), the lower target price is attributed to our more cautious earnings outlook. AXREIT’s diversified portfolio of industrial assets may be favoured for its stronger resilience against ongoing stresses from consumer spending. However, possible strains to earnings in addition to diminishing yields may lead investors to look elsewhere until it is able to secure a sturdier tenant portfolio. 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) bond yield expansion, (ii) higher/lower-than-expected rental reversions, and (iii) higher-than-expected occupancy rates.

Source: Kenanga Research - 27 Jul 2023