AXREIT is acquiring an industrial complex in Klang for RM49.0m. At an asset yield of 7%, the acquisition is earnings accretive to AXREIT. We maintain our forecasts pending the completion of the deal. However, we raise our TP valuation by 3% as we roll over to FY25F and upgrade our call to MARKET PERFORM from UNDERPERFORM as value has emerged after the recent weakness in its share price.

Acquisition of an industrial complex. AXREIT is acquiring an industrial complex in Kawasan Industri Bukit Raja, Klang for RM49.0m from Amsteel Mills Sdn. Bhd, which appears to be at a slight discount from the appraised market value of RM50.0m. The proposed acquisition is targeted to complete by 3QFY24.

The c.347k sq.ft. leasehold industrial complex has an NLA of c.200k sq.ft. and is currently occupied by the vendor. The vendor will continue to lease back the property from AXREIT at an agreed rental of RM3.43m per year for a fixed period of 6 years, subject to agreed stepup throughout the term of lease. This translates to an annual yield of 7% (within AXREIT’s current overall investment asset yield of c.7%). The acquisition of the property will be funded by existing bank financing of AXREIT. The acquisition is in line with its investment objectives of acquiring high quality assets.

Forecasts. Maintained pending the completion of the deal. Based on our estimates, the acquisition will boost our FY24F core net profit by c.2%, while raising its debt from RM1.55b to RM1.6b and gearing from 34% to 35% as at FY23, which is still below the 50% gearing limit prescribed by the SC for listed REITs.

Valuations. Against an unchanged target yield of 5.5% (derived from a 1.5% yield spread above our 10-year MGS assumption of 4.0%), we roll over our valuation base year to FY25F. This raises our TP to RM1.62 (from RM1.58). There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4).

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. That said, value has emerged after the recent weakness in its share price. Upgrade to MARKET PERFORM from UNDERPERFORM.

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

Source: Kenanga Research - 26 Feb 2024