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%. We raise our FY25F net profit forecast accordingly, lift our FY25F distribution by 6.7% and TP by 6% to RM1.72 (from RM1.62) but maintain our 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.

We 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. We raise our FY25F earnings forecast by 6.5%.

Valuations. Correspondingly, we lift our 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 our TP based on ESG given a 3-star rating as appraised by us (see Page 4).

Investment case. We continue 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 our 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.

Source: Kenanga Research - 23 Apr 2024