AXREIT’s 9MFY23 results met our forecast but disappointed the market. Its 9MFY23 gross revenue was flattish as higher rental reversion was offset by a drop in overall occupancy rate to 92.0% (- 3.0ppt). The outlook for industrial properties is weighed down by incoming new supply. We fine-tune up our FY24F earnings by 2% and similarly TP by 2% to RM 1.58 (from RM1.55) but maintain our UNDERPERFORM call.

Met our expectation. AXREIT’s 9MFY23 core net profit of RM103.9m met our expectation at 76% of our full-year forecast but disappointed the market at only 67% of the full-year consensus estimate. Meanwhile, a distribution per unit of 2.15 sen (YTD: 6.25 sen) is on track to meet our FY23F forecast of 8.4 sen.

YoY, its 9MFY23 gross revenue was flattish as higher rental reversion was offset by a drop in overall occupancy rate to 92.0% (-3.0ppt). The decline in occupancy rate was influenced by the recent loss of certain tenants. Additionally, non-operating expenses increased by 23% mainly driven by higher interest payments from a rising rate environment, resulting to a 17% decline in net profit. As a result, this translated to 9MFY23 distributable income and core net profit of RM110.7m (-10%) and RM103.9m (-14%), respectively.

Outlook. Following a drop in tenant occupancy, AXREIT is seeking to acquire Grade-A logistics facilities and strategically located manufacturing properties with long lease agreements, such as the recent acquisition of a manufacturing facility in Sendayan Techvalley, Negeri Sembilan. The impact on earnings from these acquisitions, primarily involving tenanted properties, is expected to be minimal but may lead to compounded earnings growth. The group had kept an acquisition target of RM170m for FY23. However, in the context of the current surge in the supply of industrial properties, AXREIT may face heightened competition as potential tenants may be spoilt for choice.

Forecast. We fine-tune up our FY24F earnings by 2% to reflect the recently announced property acquisition that will increase its total rental revenue by RM3m/year.

Maintain UNDERPERFORM but with a slightly higher TP of RM1.58 (from RM1.55). The increased TP is on the back of the abovementioned earnings adjustment against an unchanged target yield of 5.5% (derived from a 1.5% yield spread above our 10-year MGS assumption of 4.0%). AXREIT’s diversified portfolio of industrial assets may be favoured for its stronger resilience against ongoing stresses on 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 (see Page 4).

Risks to our call include: (i) bond yield contraction, (ii) higher-than-expected rental reversions, and (iii) higher-than-expected occupancy rates.

Source: Kenanga Research - 30 Oct 2023