Axis REIT’s New Acquisitions In Bukit Raja; Analysts See A Positive Move

Axis REIT announced the signing of two sale and purchase agreements (SPA) to acquire two properties in Bukit Raja for a total lump sum of MYR351.8m from Amsteel Mills (vendor).

The first acquisition is expected to be completed by end-2024, with the second by end-2025. Following the acquisition, Axis REIT’s gearing ratio will increase to 39%.

RHB Investment Bank (RHB), in its Malaysia Company Update today Apr 23), said the first acquisition is for an industrial complex (property 1) with a NLA of 924k sq ft and is adjoining to Axis Facility 2 @ Bukit Raja. The property is fully occupied by the vendor (manufacturing of steel bars and wire rods) and will be sold and leaseback to the vendor with a fixed monthly rental or MYR1.8m for years one to three, and for MYR1.9m for years four to six.

The property will be purchased for MYR313m – close to its market value of MYR314m – and is expected to be completed by end-2024.

The second acquisition is for a vacant storage yard (property 2) spanning 7.1 acres across from property 1. This will be purchased for a price consideration of MYR38.8m. As the property is vacant, the purchase price will be paid on a deferred basis, with 50% due within 12 months of the SPA becoming unconditional, and the remaining 50% within the subsequent 12 months.

The property is expected to be delivered by end-2025, and Axis may redevelop it prior to the delivery if requested by a potential new tenant.

Acquisition to be fully funded via borrowings

Following the acquisition, RHB expects the REIT’s borrowings to increase to 39% from 34% as at end-Dec 2023. As 60% of the REIT’s borrowings are on fixed rate, they forecast its cost of borrowings to be stable around 3.9%.

Positive on the acquisition

The gross yield of 7% for property 1 is attractive, especially as industrial properties have been priced at a premium in recent years. However, the building’s age is approximately 33 to 40 years, and as such, may need more upkeeping costs in the long run.

Meanwhile, the valuation for property 2 is reasonable at c.MYR125 psf (by land area). RHB also thinks the payment structure for the vacant property 2 is fair as it allows time for Axis REIT to secure a tenant.

Note that Axis is familiar with the Bukit Raja area, with its existing three properties in the portfolio covering approximately 44 acres of land.

RHB maintains a BUY call on raised FY25-26 earnings forecast by 2%, taking into account the higher interest expense after the acquisition. RHB’s new TP incorporates a 2% ESG premium.

Acquiring Amsteel Mills Plant For RM352m

Meanwhile, Kenanga Investment Bank (Kenanga) said today that AXREIT is acquiring Amsteel Mills plant in Klang, Selangor, for  RM351.8m. At an asset yield of 7%, the acquisition will be earnings  accretive to the tune of 6.5%. Kenanga raised their  FY25F net profit  forecast accordingly, lift their  FY25F distribution by 6.7% and TP by  6% to RM1.72 (from RM1.62) but maintain their MARKET PERFORM call.

AXREIT is acquiring Amsteel Mills plant in Kawasan Perusahaan Bukit  Raja comprising an industrial complex on a 60-acre leasehold land and  7.1-acre storage yard for RM351.8m cash.

Industrial complex. Valued at RM313m, the industrial complex is  currently fully occupied by Amsteel Mills, who will lease it back from  AXREIT for six years at RM21.9m/year with an upwards adjustment from the fourth year. AXREIT will receive a yield of 7%, which is  consistent with its current overall investment asset yield of c.7%. The  acquisition is expected to be completed at end-4QCY24. 

Storage yard. Valued at RM38.8m, the storage yard is currently vacant.  AXREIT hopes to lease out the land by end-CY25.

Kenanga is are positive on the deal. The debt-funded acquisition will be  earnings accretive to the tune of 6.5%. The acquisition will increase  AXREIT’s net debt and gearing from RM1.55b and 0.34x to RM1.90b  and 0.42x, respectively, which is still below the 0.5x gearing limit  prescribed by the SC for listed REITs.

Forecasts. Kenanga raise our FY25F earnings forecast by 6.5%. 

Valuations. Correspondingly, Kenanga lifted their FY25F distribution to 9.5 sen  (from 8.9 sen), resulting in a 6% higher TP of RM1.72 (from RM1.62)  based on unchanged target yield of 5.5% (derived from a 1.5% yield  spread above our 10-year MGS assumption of 4.0%). There is no  adjustment to their TP based on ESG given a 3-star rating as appraised  by them.

Investment case. Kenanga continues to like AXREIT as a proxy to industrial  assets on the growing SME sector and the sustained inflows of foreign  direct investment to Malaysia. Maintain MARKET PERFORM.

Risks to their call include: (i) rising risk-free rate, (ii) over-supply of  industrial assets resulting in depressed rental and occupancy rates, and  (iii) default on rental payments by tenants.

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