Axis Real Investment Trust’s (Axis REIT) earnings growth is expected to be flattish this year given the influx of alternative industrial products offered by property developers.
“Following the suspected drop in tenant occupancy, the group continues to seek and acquire Grade-A logistics facilities, and strategically located manufacturing properties with long lease agreements.
“Minimal impact on earnings is anticipated from these acquisitions, primarily involving tenanted properties, but may lead to compounded earnings growth.
“However, heightened competition looms due to the surge in industrial property supply, offering potential tenants’ abundant choices,” Kenanga Research said in its Results Note today (Jan 24).
For FY24F, the research house raised the REIT’s FY24F earnings forecasts by 2% as it input FY23’s full-year performance.
“Meanwhile, we introduce our FY25F numbers which reflects a flattish growth from FY24, premised on possible challenges in the industrial real estate investment trusts (REITs) space,” it said.
Kenanga said the REIT’s FY23 results beat its forecast but met the market as rental revenues were better than expected.
“The REIT’s FY23 core net profit of RM146.3 million exceeded our expectation by 6% but met consensus estimate.
“The positive deviation from our end was attributed by slightly less optimistic rental income over concerns of occupancy rates which may dampen top line delivery,” it said.
Axis REIT’s distribution per unit of 2.4 sen for the quarter, with total DPU for the year of 8.65 sen is deemed within our FY23 expectation of 8.4 sen.
Year-on-year (YoY), its FY23 revenue was flattish, which we suspect is attributed to declining occupancy rates from 95% in FY22 from the loss of certain tenants during the year.
“We note that net property income margin saw a slight decline to 84.6%, which is a decline by 1.7 ppt likely due to higher overall maintenance.
“On the flipside, net investment income rose by 15%, thanks to higher revaluation gains from the appreciation of several key assets such as Bukit Raja Distribution Centre 2.
“That said, excluding this would led to the REIT’s FY23 core net profit to come in at RM146.3 million, less than 7%, no thanks to higher financing cost on a higher interest rate environment.
Quarter-on-quarter (QoQ), revenue increased by 5% as occupancy rates could have picked up.
“Interest and investment income experienced a significant surge of 509% from the abovementioned revaluation gains. Excluding this,
4QFY23 core net profit still increased by 12%, supported by the stronger top line,” it said.
Kenanga maintained its UNDERPERFORM call and TP of RM1.58, based an unchanged target yield of 5.5%, which is derived from a 1.5% yield spread above our 10-year MGS assumption of 4%.
“Axis REIT diversified portfolio of industrial assets may be favoured for its stronger resilience against ongoing stresses on retail REITs due to soft consumer spending.
“However, similar to retail REITs, competition is intensifying due to the massive incoming supply of space to the market as mentioned. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us,” it said.
The risks to its call include bond yield contraction, higher-than-expected rental reversions, and higher-than-expected occupancy rates.
