• Maintain BUY, new MYR2.11 TP from MYR2.04, 15% upside with c.6% yield. 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%.

• 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 (figure 1). 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, we expect 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, we forecast its cost of borrowings to be stable around 3.9%.

• Positive on the acquistion. 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). We also think 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 (figure 2).

• Maintain BUY. We raise our FY25-26 earnings forcast by 2%, taking into account the higher interest expense after the acquisition. Our new TP incorporates a 2% ESG premium.

Source: RHB Research - 23 Apr 2024