AXREIT’s FY23 results beat our forecast but met the market as rental revenues were better than expected. The prospect for industrial properties is dampened by the influx of new supply. We fine-tune up our FY24F earnings forecast by 2% but maintain our TP of RM 1.58 and UNDERPERFORM call.

Above expectations. AXREIT’s FY23 core net profit of RM146.3m exceeded our expectation by 6% but met consensus estimate. The positive deviation from our end was attributed by slightly less optimistic rental income over concerns of occupancy rates which may dampen top line delivery. Meanwhile, a distribution per unit of 2.4 sen (YTD: 8.65 sen) is deemed within our FY23 expectation of 8.4 sen.

YoY, its FY23 revenue was flattish, which we suspect is attributed to declining occupancy rates (FY22: 95%) from the loss of certain tenants during the year. We note that net property income margin saw a slight decline to 84.6% (-1.7ppt) likely due to higher overall maintenance. On the flipside, net investment income rose by 15%, thanks to higher revaluation gains from the appreciation of several key assets (i.e. Bukit Raja Distribution Centre 2). That said, excluding this would led to AXREIT’s FY23 core net profit to come in at RM146.3m (-7%), no thanks to higher financing cost on a higher interest rate environment.

QoQ, revenue increased by 5% as occupancy rates could have picked up. Interest and investment income experienced a significant surge of 509% from the abovementioned revaluation gains. Excluding this, 4QFY23 core net profit still increased by 12%, supported by the stronger top line.

Outlook. Following the suspected drop in tenant occupancy, the group continues to seek and acquire Grade-A logistics facilities, and strategically located manufacturing properties with long lease agreements. Minimal impact on earnings is anticipated from these acquisitions, primarily involving tenanted properties, but may lead to compounded earnings growth. However, heightened competition looms due to the surge in industrial property supply, offering potential tenants’ abundant choices.

Forecasts. We raise our FY24F earnings by 2% as we input FY23’s full-year performance. Meanwhile, we introduce our FY25F numbers which reflects a flattish growth from FY24, premised on possible challenges in the industrial REITs space given the influx of alternative industrial products offered by property developers.

Valuations. However, we maintain our TP of RM1.58 based an unchanged target yield of 5.5% (derived from a 1.5% yield spread above our 10-year MGS assumption of 4.0%).

Investment case. AXREIT’s diversified portfolio of industrial assets may be favoured for its stronger resilience against ongoing stresses on retail REITs due to soft consumer spending. However, similar to retail REITs, competition is intensifying due to the massive incoming supply of space to the market as mentioned. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4). Maintain UNDERPERFORM.

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

Source: Kenanga Research - 24 Jan 2024