• Maintain BUY, new MYR2.19 TP from MYR2.32, 16.5% upside and c.5% yield. Axis REIT’s continues to deliver strong performances with results that were broadly in line with expectations – thanks to contributions from newly acquired assets and positive rental reversions. After MYR445m worth of completed acquisitions so far this year, and another MYR120m in acquisition target value, the REIT is on track for stable earnings growth – allowing it to remain a key defensive play going forward in our view.

• Earnings in line. A core net profit of MYR42.7m during the quarter brought 1H22 earnings to MYR81.5m (+28% YoY), which we deem in line with expectations at 52% of our and Street’s estimates. 1H22 revenue increased 18.3% YoY due to positive rental reversions and rental contributions from four new acquisitions in the past year, with the most recent being a logistics warehouse in Johor for MYR390m – Axis REIT’s largest acquisition to date. On a QoQ basis, revenue increased 8.7% while core profit rose 17%. A 2.55 sen DPU was declared vs 2.42 sen and 2.40 sen in 1Q22 and 2Q22.

• Stable occupancy rates. The REIT’s blended occupancy rate remains stable at 96%, considering the single-tenanted nature of industrial assets that make up 93% of its portfolio. Most of the assets with occupancy rates of <90% are the REIT’s office assets, which are seeing lower demand. However, Axis REIT has secured new leases for Crystal Plaza, which is now back above the 90% occupancy level. Out of c.22% of total NLA due for renewal this year, 65% have been renewed to date. Management expects this reversion to continue to be positive this year on encouraging demand for warehouse and logistics assets (+5.6% reversion rate in FY21).

• Prospects still bright with inorganic growth. Axis REIT has one ongoing acquisition for a logistics warehouse in Klang in addition to the MYR120m acquisition target value. For ongoing developments, the construction for the Bukit Raja Distribution Centre 2 (BRDC2) – a built-to-suit development that will be fully tenanted by Shopee Express Malaysia – began this month with the lease expected to commence by Sep 2023. We are upbeat on the contributions of this redeveloped asset to the REIT’s long-term prospects, with Shopee Express Malaysia expected to be one of the REIT’s top three tenants.

• Maintain BUY. We adjust our FY22F-24F earnings by 3-7% to factor in contributions from BRDC2 with guidance from management. We also make adjustments to the unit base post the income distribution reinvestment plan or IDRP, as well as our cost of equity assumption to incorporate the higher interest rate expectation. Our TP takes in a 4% ESG premium, given that Axis REIT’s ESG score of 3.2 is above the country median.

Source: RHB Research - 21 Jul 2022