AXREIT is acquiring two vehicles sales and service centres in the Klang Valley for RM125m. At an initial yield of 6.2%, the acquisition is earnings accretive. We raise our FY25F net profit forecast by c.1%, lift our TP by 1% to RM1.74 (from RM1.72) and maintain our MARKET PERFORM call.

AXREIT is acquiring two vehicles sales and service centres in Petaling Jaya (with a gross floor area of 156k sq ft) and Batu Caves (70k sq ft) respectively from Cycle & Carriage Bintang Berhad for RM125m. Both properties are currently occupied by the vendor who will continue to lease them back from AXREIT for a term of 10 years at a starting rental translating to a 6.2% yield based on the purchase price.

We estimate that the acquisition will boost its FY25F earnings by c.1% and raise its net debt from RM1.61b to RM1.74b and net gearing from 0.35x to 0.36x, which is still below the 0.5x gearing limit prescribed by the SC for listed REITs.

Forecasts. We lift our FY25F earnings forecast by c.1% accordingly.

Valuations. Correspondingly, we lift our TP by 1% to RM1.74 (from RM1.72) based on an 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 inflow 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 - 24 May 2024