• Keep BUY, new MYR2.08 TP from MYR2.14, 14% upside and c.5% yield. Axis REIT’s 1H23 earnings missed expectations due to higher one- off expenses and a lower occupancy rate. Nevertheless, we remain positive on the stock as its occupancy rates are expected to improve in August – following the commencement of leases in its newly redeveloped properties – and as the REIT is still actively looking for new acquisitions, with a MYR170m target for 2H23.

• Missed expectations. 2Q23 core earnings came in at MYR33.6m (+3.6% QoQ, -21.3% YoY), bringing 1H23 core earnings to MYR66.1m (-18.9% YoY). This was below expectations at 39% and 41% of our and consensus’ full-year estimates. Axis REIT declared a DPU of 2.05 sen, bringing 1H23 DPU to 4.1 sen (1H22: 4.97 sen).

• Results review. The REIT’s portfolio occupancy rate fell to 89% in 2Q23 (1Q23: 92.7%, 4Q22: 95%) due to the termination of the lease agreement at Axis Steel Centre in May. QoQ, revenue was down 2.5% due to the lower occupancy rate, while core earnings were 3.6% higher, owing to the 10.9% lower maintenance cost and 6.4% lower non-property expenses – mainly attributed to higher provision of doubtful debts made in 1Q23. Management guided that no further provisions would be made following the retrieval of vacant possession of Axis Steel Centre in early June. In 1H23, revenue was only slightly lower YoY (-0.4%), but higher maintenance expenses, a 25.2% increase in interest expenses, and a total of MYR5.2m provisions of doubtful debt led to core earnings falling by 18.9% YoY.

• A stronger 2H23. Shah Alam Distribution Centre 3, which has been at 47% occupancy following the end of a tenant rental agreement at end Dec 2022, will return to full occupancy from Aug 2023. The redevelopment of Bukit Raja Distribution Centre 2 has been completed and is awaiting the final Certificate of Compliance and Completion in August before being handed over to SPX Xpress, making it one of the REIT’s biggest tenants. Axis Facility 2 also saw its new tenancy commence in mid-May as it was previously under major enhancements to obtain a green building certification. All in all, management guided that the portfolio occupancy rate will improve to 92% following the handover to SPX Xpress.

• We lower our FY23F earnings forecasts by 8% after adjusting our occupancy and cost assumptions, while keeping our FY24-25F earnings unchanged. We also lower our ESG score to 3.1 from 3.2 to normalise the ESG scores across our coverage. As a result, we cut our TP to MYR2.08 from MYR2.14 after baking in a 2% ESG premium. Key risks include non- renewal of its expiring leases, and increased competition.

Source: RHB Research - 27 Jul 2023