AXREIT’s 1QFY24 results and distribution were within expectations. Its 1QFY24 core net profit rose 23% YoY due to maiden contribution from Bukit Raja Distribution Centre 2, positive rental revision, and the absence of lumpy expenses. We fine-tune our FY24-25F earnings forecasts by -1.2% and +0.2% but keep our TP of RM1.72 and MARKET PERFORM call.

Within expectations. AXREIT’s 1QFY24 core net profit came within expectations at RM40.0m, achieving 24% of both our full-year forecasts and full-year consensus estimate. The group declared a distribution of 2.3 sen per unit, on track to meet our full-year forecast of 9.5 sen.

YoY, its revenue jumped 8% mainly attributed to the new rental stream from Bukit Raja Distribution Centre 2 which started in Aug 2023, further boosted by positive rental reversion. Its core net profit rose by a sharper 23% from a low base a year ago due to lumpy building expenses.

QoQ, its 1QFY24 core net profit rose 5% despite a flattish top line as some reversal of doubtful debts and the absence of tax (it typically only pays tax in 4Q) more than offset higher maintenance cost.

Outlook. AXREIT is on the outlook for high-yielding industrial assets. It recently bagged Amsteel Mills industrial complex in Bukit Raja, Klang for RM313m, which will add RM23m rental income from FY25.

Additional rental incomes will also come from Bukit Raja Distribution Centre of which tenancy lease has commenced while Axis Mega Distribution Centre (Phase 2) was completed in Mar 2024.

We hold the view that the prospects for industrial assets are stable given the sustained inflow of foreign direct investment, a robust export sector (partly benefitting from the weak ringgit), and a growing consumer market, particularly the e-commerce segment, creating demand for large-scale distribution hubs. However, these are partially offset by the influx of new supply.

Under these circumstances, we expect AXREIT’s occupancy rate to rise (from the current 89%) and to be about to eventually fill 14 out of its total 63 properties that are taken up as present.

Forecasts. We fine tune our FY24F and FY25F earnings forecasts by - 1.2% and +0.2%, respectively.

Valuations. We maintain our TP of RM1.72 based on FY25F net distribution of 9.5 sen against a target yield of 5.5% (derived from a 1.5% yield spread above our 10-year MGS assumption of 4.0%). There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4).

Investment case. We continue to like AXREIT as a proxy to industrial assets on the growing SME sector and the sustained inflows of foreign direct investment to Malaysia. Maintain MARKET PERFORM.

Risks to our call include: (i) rising risk-free rate, (ii) over-supply of industrial assets resulting in depressed rental and occupancy rates, and (iii) default on rental payments by tenants.

Source: Kenanga Research - 24 Apr 2024