• Maintain BUY and MYR2.11 TP, 13% upside with c.5% FY24F yield. Axis REIT’s 1Q24 results are in line with expectations, with strong YoY earnings growth from the commencement of new leases and lower one-off expenses. After completing one acquisition in January, the REIT is now in the process of acquiring three other properties for a total of MYR410m. We expect earnings to grow YoY in 2H24, as the development of Axis Mega Distribution Centre (AMDC) Phase 2 was completed at end-March.

• Results in line. 1Q24 core earnings of MYR39.9m (+22.9% YoY, -5.8% QoQ) are broadly in line with expectations at 22-23% of our and Street’s full-year estimates. Axis REIT declared a first interim DPU of MYR0.023 (1Q23: MYR0.0205, 4Q23: MYR0.024). Its gearing ratio stood at 35.1% as at end- March.

• Results review. On a YoY basis, revenue increased 7.6% from higher occupancy rates and the commencement of leases from the redeveloped Axis Facility 2 and Bukit Raja Distribution Centre (BRDC) 2. Property expenses dropped by 3.9% YoY as 1Q23 saw higher one-off maintenance costs, while non-property expenses fell by 6.3% due to the high provision for doubtful debts made last year for a defaulted tenant. On a QoQ basis, revenue fell slightly due to the lower occupancy rate as the short tenancy for Axis Steel Centre in 4Q23 had ended, leaving the building vacant. Property expenses rose 6.4% QoQ due to higher maintenance cost, and 4Q23 also saw a reversal for the provision of doubtful debts of MYR1.1m, which resulted in a 5.8% QoQ decline in earnings.

• Better earnings prospects for FY24. On top of the full-year contribution of BRDC2 this year (lease commenced in Aug 2023), Axis REIT obtained the certificate of completion for AMDC Phase 2 on 27 Mar, thereby adding NLA of 509k sqf to the property (c.7% of portfolio NLA) although no tenants have been secured yet. YTD, Axis REIT has completed the acquisition of Axis Hypermarket @ Temerloh (back in January) for MYR26m, and will look to complete the acquisitions of three manufacturing facilities for a combined MYR410m in Sendayan and Bukit Raja by the end of this year.

• Earnings revision. Post results, we lower FY24F earnings by 5% after adjusting our rental rate assumptions, and making minor changes to our FY25-26 net profit forecasts. Our TP includes a 2% ESG premium, based on our in-house methodology, with five of Axis REIT’s properties receiving green certifications as at Dec 2023. Key risks: Delays/cancellations of acquisitions, non-renewal of its expiring leases, and intensifying competition.

Source: RHB Research - 24 Apr 2024