AXREIT is disposing off Axis Steel Centre@SiLC, a low-yielding industrial complex in Nusajaya, Johor, for RM162m. We believe it is getting a fair deal here. We trim our FY24-25F net profit forecasts by 2% and 1%, respectively, but maintain our TP of RM1.72 and MARKET PERFORM call.

AXREIT is disposing off Axis Steel Centre@SiLC, an industrial complex sitting on c.27 acres of land in Nusajaya, Johor for RM162m, to an unspecified buyer. AXREIT will register RM0.5m gain from the disposal.

The disposal appears to be fairly priced at RM133 psf, coming within the market range of RM80-RM160 psf for similar assets (industrial land with buildings), albeit in varying land sizes.

The proceeds will reduce its net debt and gearing as at end-Dec 2023 from RM1.50b and 0.33x to RM1.39b and 0.32x, respectively, which will beef up its war chest.

We believe the key rationale for the disposal is to optimise its asset portfolio of over 63 assets by parting with the low-yielding ones. We estimate that Axis Steel Centre@SiLC only generates a 4.1% asset yield based on its latest reported rental revenue.

Forecasts. We trim our FY24-25F net profit forecasts by 2% and 1% respectively, as the annual rental foregone estimated at RM6.6m will not be fully compensated with interest savings of c.RM3m.

Valuations. However, we maintain our TP of RM1.72 based on FY25F net distribution of 9.5 sen against a 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 - 25 Apr 2024