AXREIT is acquiring a tenanted industrial property in Seremban for RM48.0m. Based on an asset yield of 6.25%, the acquisition is earnings accretive (given AXREIT’s current overall investment asset yield of c.6%). Pending the completion of the deal, we maintain our forecasts and TP of RM1.55. We also keep our UNDERPERFORM call as AXREIT’s current yields are unattractive.

Acquisition of a tenanted property. AXREIT is acquiring a tenanted industrial property within Kawasan Perindustrian Sendayan Techvalley in Seremban from BSS Development Sdn Bhd, Matrix IBS Sdn Bhd and the Menteri Besar, Negeri Sembilan (Incorporation) for RM48.0m cash.

The property, comprising a 637k sq ft freehold land with an existing industrial complex, is currently leased to an international manufacturing company on a 6-year lease in Mar 2023 at a rental of RM250k/mth (or RM3.0m/year), subject to an 8% increase from Mar 2026. This translates to an annual yield of 6.25% (vs. AXREIT’s current overall investment asset yield of c.6%).

The acquisition is in line with the group’s FY23 acquisition target of RM170m. Based on our estimates, the acquisition will boost our FY24F core net profit by c.1%, while raising its net debt and gearing of RM1.49b and 0.54x as at end-Jun 2023 to RM1.53b and 0.56x, respectively, which is still below the 60% gearing restriction in compliance with the REITs’ listing rules of Bursa Malaysia.

Forecasts. Maintained pending the completion of the deal.

Maintain UNDERPERFORM and TP of RM1.55. Our TP is based on an unchanged target yield of 5.5% (derived from a 1.5% yield spread above our 10-year MGS assumption of 4.0%). AXREIT offers proxy to industrial assets which may benefit from the relocation of MNC’s manufacturing base to Southeast Asia from China. However, its yields are unattractive at current levels. 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/lowerthan-expected rental reversions, and (iii) higher-than-expected occupancy rates.

Source: Kenanga Research - 26 Oct 2023