• Maintain BUY, new MYR2.04 TP from MYR2.08, 13% upside with c.6%FY24F yield. Axis REIT’s 9M23 earnings missed expectations due to lower-than-expected revenue growth. Its FY23F numbers may indicate a low performing year due to higher expenses and lower occupancy rates. However, the commencement of a lease with SPX Xpress in August, signing of new tenancy agreements, and completion of other major developments leads us to expect FY24F to be a much stronger year.

• Missed expectations. 3Q23 core earnings of MYR37.9m (+12.7% QoQ,-4.4% YoY) brought the 9M23 metric to MYR103.9m (-14.2% YoY). This made up just 67% and 65% of our and Street full-year estimates. Axis REIT declared a DPU of 2.15 sen, bringing 9M23 DPU to 6.25 sen (9M22: 7.42sen).

• Results review. Revenue for the quarter grew by 4.9% QoQ (flat YoY) as the occupancy rate improved to 92% from 89% the quarter before, upon the commencement of new tenancies in Bukit Raja Distribution Centre 2(BRDC2) and Shah Alam Distribution Centre 3 (SADC3) in August, while its higher financing cost was offset by the lack of provisions (for rental default)made in the quarter. However, 9M23 revenue growth was flat YoY, and the financial period was marked by a lower NPI margin (due to one-off expenses), 19% higher financing costs (interest rate hikes), and a MYR5.3m provision for a defaulted tenant while resulted in core earnings declining by 14% YoY.

• A stronger FY24F. With interest rate hikes nearing an end and no further provisions needing to be made, costs should be under control next year on top of higher revenue growth. SPX Xpress’s tenancy at BRDC2 brings in a monthly rental income of MYR1.35m, making it the REIT’s fourth largest tenant. With SADC3 back to full occupancy, only 10 properties are left with occupancy rates below 90%. With Axis REIT having taken back vacant possession of Axis Steel Centre (c.5% of FY22 revenue) from YongnamEngineering after it defaulted on its rent, management was hopeful that a new tenant could be signed by next year as the generic facilities should be ready to use. Axis REIT announced that it has shelved the proposed acquisition of a logistics warehouse in Kulim worth MYR92m, but signed a sale and purchase agreement involving a manufacturing facility in Sendayan worth MYR48m. Its letter of offer accepted for a hypermarket in Temerloh worth MYR25.8m was also accepted.

• We trim FY23F earnings by 8% after adjusting our occupancy rate and cost assumptions, while keeping FY24-25F net profit unchanged. As such, we lower our DDM-derived TP to MYR2.04. Our TP incorporates a 2% ESG premium, based on our in-house methodology. Key risks include the nonrenewal of its expiring leases, and increased competition.

Source: RHB Securities Research - 30 Oct 2023