AXREIT has proposed a placement of 263m new units (15.1% of total units) to lower its financing ratio from 0.42x to 0.34x. While slightly ahead of our timeline assumption, this move is in line with expectation as management had previously guided it would raise capital once gearing exceeds 0.4x. Thanks to interest savings of RM18m anticipated from the exercise, we raise our FY25F earnings by 7%. However, due to the dilution in effective dividend payments by 7%, our TP of RM1.84 is reduced to RM1.71. Maintain MARKET PERFORM call.

AXREIT announced to undertake a proposed placement of up to 263,000,000 new units, representing approximately 15.05% of the total number of units issued of 1,747,492,159 as at 6 August 2024. Assuming the issue price to be RM1.73, estimated net proceeds will come in at RM449.8m.

The group plans to utilize all of the proceeds for the repayment of loans to lower its financing ratio. Post completion, the proposed placement will bring its gearing ratio from 0.42x to 0.34x (in line with management’s target), offering AXREIT wider room to fund more acquisitions goings forward. The targeted completion of the exercise will be in 4QFY24.

Share dilution. We keep a neutral stance on the proposed placement as although AXREIT is expected to enjoy interest savings of RM18m from paring down its debt, the share dilution is expected to lower our FY25 net dividend forecast per share to 9.4 sen from 10.1 sen.

Forecasts. We adjust FY25 earnings forecast by +7% on lower interest expenses.

Valuations. Reduce TP to RM1.71 from RM1.84 based on FY25F net distribution of 9.4 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 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) over-supply of industrial assets resulting in depressed rental and occupancy rates, and (ii) default on rental payments by tenants.

Source: Kenanga Research - 2 Sep 2024