• Maintain BUY and MYR2.14 TP, 12% upside with c.5% FY23F yield. Axis REIT’s 1Q23 results were below expectations, due to an increase in one- off expenses. The REIT also announced that it is acquiring its maiden industrial warehouse in Kulim for MYR92m, and has an acquisition target value of MYR140m. With its gearing level at only 33%, we are still positive on the REIT’s prospects, which will be driven by both acquisitions and redevelopments of its existing assets.

• Missed expectations. 1Q23 core earnings of MYR32.4m (-11.9% QoQ, - 16.3% YoY) were slightly below expectations, at only 19% of our and consensus full-year estimates. Axis REIT declared a first interim DPU of 2.05 sen (1Q22: 2.42 sen).

• Results review. Revenue was 0.8% lower QoQ, from a lower occupancy rate as one of the leases at Axis Shah Alam Distribution Centre 3 expired in Dec 2022. Management hopes to secure a new tenant only by 1H23. Property expenses rose 15.8% QoQ from one-off building expenses that were recognised in the quarter (maintenance cost), and non-property expenses increased 6.1% QoQ due to a MYR3.5m provision for doubtful debts for Yongnam Engineering, the lessee of Axis Steel Centre. As a result, the NPI margin was compressed at just 84% (FY22: 87%). With a 64% fixed interest rate for financing (2022: 47%), we expect the effective profit rate ahead to be close to the 4.04% recorded in 1Q23.

• New logistics warehouse in Kulim. Axis REIT announced the acceptance of a letter of offer to acquire a logistics warehouse for MYR92m in Kulim, Kedah. This marks the REIT’s first foray into the state, as Selangor (46%) and Johor (38%) assets account for the majority of its footprint. The warehouse has a net lettable area of 311,218 sqf, and will be purchased on a sale and leaseback basis over five years. The acquisition is expected to be completed in 1H23. Note that the REIT has a further acquisition target value of MYR140m.

• Developments on track. Management guided that the redevelopment of Bukit Raja Distribution Centre 2 is c.80% completed, and is on track for lease commencement by Shopee Express Malaysia in September. The development of Axis Mega Distribution Centre Phase 2 (construction cost: MYR130m) began in 1Q23, and is expected to be completed in 1Q24.

• Despite the earnings miss, we maintain our earnings forecasts for now, as we expect its performance to improve from a possible reversal of the provision, the lack of one-off expenses, as well as income contributions from new acquisitions. Our TP includes a 4% ESG premium applied to the REIT’s intrinsic value, as per our in-house methodology. Key risks are the non- renewal of its expiring leases and negative rental reversions.

Source: RHB Research - 19 Apr 2023