• Maintain BUY, MYR2.08 TP, 15% upside and c.6% yield. Axis REIT is acquiring an industrial property in Negeri Sembilan for a lump sum cash consideration of MYR48m. The property has a gross yield of 6.3%, is fully occupied, and has a fixed 8% rental increment on Mar 2026. We continue to like Axis REIT as a proxy to the resilient industrial property segment.

• The acquisition. Axis REIT announced the proposed acquisition of an industrial property in Sendayan Techvalley, Negeri Sembilan, from BSS Development and Matrix IBS. The property – comprising a single-storey detached factory, a single-storey detached office, a double-storey detached office, a single-storey canteen, and other ancillary structures – will be acquired for a lump sum cash consideration of MYR48m. The 5-year old property has a total NLA of c.105,311sq ft.

• The lessee and its contributions. The lessee is an international company that manufactures machinery for mining, quarrying, and construction. The acquisition is slated for completion in 1H24, with a monthly rental of MYR250k. The lease is for a fixed period of six years commencing 1 Mar 2023, with an option to renew for four further terms of three years. The rental rate shall increase by 8% for the period 1 Mar 2026 - 28 Feb 2029.

• Acquisition to be fully funded via borrowings. Axis REIT intends to fund the acquisition via its existing bank financing. We estimate that this will increase its gearing level slightly to 35% from 34% as at end Jun 2023. The REIT previously announced that it has an acquisition target value of MYR170m for 2H23, which would raise its gearing level to 36%.

• We are mildly positive on the acquisition. The gross yield of 6.3% is slightly higher than the REIT’s FY24F yield of c.6%, making it a yieldaccretive acquisition. However, due to the size of the asset, we expect the net income to only increase 0.5% on a full-year basis. The asset yield should increase over the years with the rental rate step-up, and the property’s relatively young age should limit the amount of asset enhancement required for upkeeps.

• Maintain BUY. We keep our earnings forecast unchanged, pending the completion of the acquisition. Axis REIT is slated to report its 3Q23 earnings on 27 Oct 2023. Our unchanged TP incorporates a 2% ESG premium based on our in-house methodology. Key risks include non-renewal of its expiring leases and increased competition.

Source: RHB Securities Research - 26 Oct 2023