• Maintain BUY and DDM-derived MYR2.04 TP, 15% upside with c.6% FY24F yield. FY23 results were in line with expectations, with 7% lower earnings due to the higher borrowing costs and non-property expenses. 4Q23 results showed a marked improvement from higher occupancy rates. We expect a strong recovery in FY24, premised on the commencement of new leases from Axis REIT’s major developments: Bukit Raja Distribution Centre 2 (BRDC2) and Axis Mega Distribution Centre (AMDC) Phase 2.

• Results in line. 4Q23 core profit of MYR42.3m (+11.8% QoQ, +15% YoY) brought the FY23 earnings to MYR146.3m (-7.4% YoY). This was in line with expectations at 100% and 96% of our and Street’s estimates. Axis REIT declared a DPU of 2.40 sen, bringing the full-year DPU to 8.65 sen (FY22: 9.75 sen).

• Results review. Axis REIT’s revenue increased 5.2% sequentially (6.8% YoY), mainly due to the full quarter impact of the new tenancies that commenced in 3Q23 at BRDC2 and Shah Alam Distribution Centre 3. Property expenses were 2.9% lower QoQ from lower maintenance costs, resulting in marginally higher net property income or NPI margin of 87.6% (3Q23: 86.2%, 4Q22: 87.6%). Axis REIT also recorded a MYR2m reversal of provisions for doubtful debts during this quarter, which led to the improved bottomline. However, full-year earnings were lower due to 14% higher financing costs (interest rate hikes) and non-property expenses (provisions for defaulted tenant).

• Better outlook ahead. On top of the full-year contributions from BRDC2, FY24 should also see the completion of AMDC Phase 2, which will double the size of the existing facility (c.4% of total NLA). We also expect the REIT to be able to secure a new tenant to fill up Axis Steel Centre @ SiLC after seizing back the vacant building – its generic facilities should be immediately suitable for prospective tenants. In terms of inorganic growth, Axis REIT completed the acquisition of Axis Hypermarket @ Temerloh for MYR26m on 16 Jan. It is also still in the midst of acquiring a manufacturing facility in Sendayan, Negeri Sembilan, for MYR48m.

• Earnings forecasts. We make minor adjustments to our FY24F-25F earnings after updating the FY23 numbers. We also introduce our FY26F earnings of MYR192m. Our TP incorporates a 2% ESG premium, based on our in-house methodology and 3.0 country median.

• Key risks include the non-renewal of its expiring leases and increased competition.

Source: RHB Securities Research - 24 Jan 2024