• Keep BUY with new DDM-derived MYR2.08 TP from MYR2.11, 11% upside and c.5% yield. Axis REIT has entered into a sale & purchase agreement to dispose the vacant Axis Steel Centre @ SiLC to a data centre operator for a total lump sum cash consideration of MYR162m. The REIT management team has been actively managing its portfolio and we are positive on the disposal, as the price psf is attractive. It also allows Axis REIT to pare down its borrowings and partly fund its recent acquisitions in Bukit Raja.

• The property. Axis Steel Centre is located within the SiLC industrial park, approximately 24km to the west of Johor Bahru city centre. It was acquired in Dec 2014 for MYR153.5m, and has a land area of 26.96 acres and NLA of 688k sqf. The expected net gain on disposal is c.MYR0.5m and should be completed in 2H24. Previously, the lease with the previous tenant was terminated in May 2023 after the tenant defaulted on rental payments. Axis REIT took back vacant possession of the property in Jun 2023.

• Positive on the disposal. Management believes that, after nine years of owning the asset (the building is 14 years old), upside to future rental reversions may be limited – considering that the building’s current capacity as a manufacturing facility. We think the price of MYR138psf by land area (and MYR235psf by NLA) is attractive for the disposal. We lower our gearing estimate from 39% (post ongoing acquisitions) to 36%, and this should provide more room for the REIT to acquire other higher-yielding assets going forward.

• Earnings revision. For context, Axis Steel Centre contributed MYR14.2m rental income (NPI: MYR13.6m) in FY22. As we had initially forecasted the building to be occupied in FY25, we lower our FY25F-26F earnings by 1.6% to account for the loss of rental contributions and potential savings on financing costs. As such, we lower our TP, which also includes a 2% ESG premium based on Axis REIT’s 3.1 ESG score, to MYR2.08.

• Key risks: Delays/cancellations of acquisitions, non-renewal of its expiring leases, and intensifying competition.

Source: RHB Research - 25 Apr 2024