• U/G to BUY from Neutral, new DDM-derived MYR1.53 TP from MYR1.42, 12% upside with c.6% FY26 yield. AME REIT’s 1QFY25 (Mar) earnings were in line with expectations, recording stable earnings growth from its fully occupied properties. The REIT also announced that it is acquiring four new properties from its sponsor for MYR119m. We upgrade our call to a BUY as we turn more positive on its inorganic growth opportunities, on top of the long-term viability of existing properties.

• Results in line. 1QFY25 core profit of MYR8.9m (-1% QoQ, +2.9% YoY) is in line with expectations at 24% of our full-year forecasts. Revenue grew 8% YoY mainly from the contribution of Plot 16 Indahpura which was acquired in Oct 2023, but dropped 1% QoQ as two properties were temporarily vacant before a new lease commenced in June. YoY, earnings only increased 3% due to both lower NPI margins and higher financing costs following the acquisition. The REIT proposed a DPU of 1.84 sen (1QFY24: 1.80 sen).

• Four new acquisitions. AME REIT announced that it has entered into sale and purchase agreements (SPA) with AME Elite (AME MK, BUY, TP: MYR2.20) for the proposed acquisition of four industrial properties for a total cash consideration of MYR119.5m; a 2% discount from its market value of MYR122m. The acquisitions for i-TechValley 46 and i-Park SAC 60 & 61 are expected to be completed in 1Q25. Meanwhile, i-Park SAC 60 & 61 and i- TechValley 34 are still under construction, hence the acquisition should only be completed in 3Q25.

• Yield accretive. With a combined gross yield of 7%, strategic location within Iskandar Malaysia, and long-term leases, we are positive on the proposed acquisitions. The leases are for a period of five to ten years with built-in rental escalations between 2.9% to 10% per annum. There is also an option to renew for a further period of three to five years. A key risk would be a non-issuance of Certificate of Completion and Compliance (CCC) for three of the properties which could delay or terminate the SPAs.

• Gearing would increase to 27% from just 14.8% as at 1QFY25 following the completion of the acquisitions. At that level, we estimate that the REIT would have a financing headroom of MYR380m before reaching the 50% gearing limit.

• Earnings estimates. We adjust our FY26-27F earnings estimates by 3-4% after factoring the acquisitions and the related financing costs. Our TP incorporates a 2% ESG premium, based on our ESG score of 3.1 for the REIT. Key risks: Delayed acquisitions, slowdown in economic growth, and lower- than-expected rental reversions.

Source: RHB Research - 25 Jul 2024