Maintain BUY and MYR2.19 TP, with 19% upside and c.5% yield. Axis REIT reported a solid performance in 3Q22, thanks to contributions from newly completed acquisitions and positive rental reversions. With an acquisition target of MYR120m, and the expected completion of multiple developments next year, the REIT is on track for stable earnings growth. We remain positive on Axis REIT as a key defensive play.
Earnings in line. The 3Q22 core net profit of MYR39.6m brought 9M22 earnings to MYR121.1m (+20.6% YoY). This is broadly in line with expectations, at 75% and 77% of our and Street’s estimates. 9M22 revenue increased 17.6% YoY due to positive rental reversions and rental contributions from its four new acquisitions. On a QoQ basis, property income dropped slightly by -0.1% due to lower other income, and core profit dropped 6.6% from higher maintenance costs, as the REIT resumed upkeep works that were delayed during the pandemic. A DPU of 2.45 sen was declared, bringing the total to 7.42 sen in 9M22 (9M21: 7.08 sen).
Occupancy rates remain stable. The REIT’s blended occupancy rate is still stable at 95%, with 48 out of the 61 properties on its portfolio having 100% occupancy. This is expected, considering the mostly single-tenanted nature of industrial assets. While the nine properties with occupancy below 90% are mostly office assets, Axis REIT has secured new leases for Axis Technology Centre, which should improve its occupancy from 52% to 73% in 4Q22. Out of c.20% of NLA due for renewal this year, 67% have been renewed to date, with positive single-digit reversions. For 2023, only c.11% of NLA is due for renewal.
Upcoming developments. With a total development cost of MYR120m, the ongoing development for Bukit Raja Distribution Centre 2 (BRDC2) is on track for opening next year, and will be fully tenanted by Shopee Express Malaysia by Sep 2023. Axis Facility 2 @ Bukit Raja is also undergoing an asset enhancement initiative, with a target completion by end-Jan 2023, and the hope of securing a tenant by end-1Q23. Management aims to ensure green building certifications for any assets that it repositions, as is the case with these two upcoming developments. Currently, the REIT only has one green certified building, which is the MYR390m logistics warehouse in Pelabuhan Tanjung Pelepas, purchased in Apr 2022.
Maintain BUY. We adjust our FY23F-24F earnings slightly by c.1% to factor in the contributions from a proposed acquisition of a manufacturing facility in Klang, after receiving details on the rental rate. Our TP takes in a 4% ESG premium based on our in-house methodology. Key risks are non- renewal of its expiring leases, and negative rental reversions.
