• Downgrade to NEUTRAL from Buy, with DDM-derived MYR1.42 TP, 9% upside. 9MFY24 (Mar) earnings were in line with expectations – AME REIT recorded a sequential pickup in earnings from the contribution of the newly acquired Plot 16 Indahpura. While occupancy rates remain at 100%, we downgrade our call on the stock as we think the upside has been mostly priced in, especially as no new acquisitions were announced over the past year.

• Results review. 3QFY24 core profit of MYR8.8m (+4.6% QoQ, +8.9% YoY) brought 9MFY24 earnings to MYR25.5m. This is in line with expectations at 74-75% of our and Street estimates. Note that cumulative YoY comparisons are not available as the REIT was only listed on 20 Sep 2022. On a QoQ basis, revenue and NPI increased by 5% and 7%, mainly attributed to the acquisition of Plot 16 Indahpura on 16 Oct 2023, as well as higher rental reversions. This resulted in a pickup in financing expense (+22% QoQ), and a marginally lower net margin of 70.9% (2QFY24: 71.2%). The REIT announced a DPU of 1.88 sen for the quarter, (9MFY24: 5.48 sen), representing a 99.6% dividend payout ratio.

• High renewal rate. Of the 12 tenancies expiring in FY24, the REIT has renegotiated 92% of the space with an 83% renewal rate, and securing a new replacement tenant, thus maintaining the REITs 100% occupancy rate. Only two tenancies are expiring in FY25F, suggesting minimal downside risks for occupancy.

• Slower pace for inorganic growth. The acquisition of Plot 16 Indahpura marks the completion of the three asset injections proposed from its IPO, but no new acquisitions have been announced since. This is primarily due to compressed yields in the market following the boom in industrial assets. In that regard, we think the pipeline of new assets from its Sponsor will be able to support the REIT’s acquisition growth strategy, but at this juncture, we are more conservative on the overall pace of acquisitions.

• Gearing. AME REIT’s gearing ratio has increased to 15.2% (2QFY24: 11.4%). We estimate that the REIT has a financing headroom of MYR450m for more acquisitions before hitting the 50% gearing limit and needing to raise funds through equity.

• Earnings estimates. We make no changes to our earnings estimates as results are in line. Our TP incorporates a 2% ESG premium, based on our ESG score of 3.1 for the REIT. Key risks: Slower/faster-than-expected pace of acquisitions, pickup/slowdown in economic growth, and higher/lower-than- expected rental reversions.

Source: RHB Research - 6 Feb 2024