• Keep BUY, new MYR1.57 TP (from MYR1.53), 12% upside and c.6% FY26F (Mar) yield. AME REIT’s 1HFY25 earnings were in line with expectations, with stable earnings growth from new acquisitions and positive rental reversions. With its fully occupied portfolio, we think AME REIT provides a solid defensive play, with earnings upside from both organic and inorganic growth opportunities, supported by the pipeline of new developments from its sponsor.

• Results in line. 2QFY25 core profit of MYR9.1m (+3% QoQ, +5% YoY) brought 1HFY25 earnings to MYR18m (+4% YoY). This was in line with expectations, at 50% of our full-year forecasts. The REIT announced a DPU of 1.87 sen, bringing the YTD total to 3.71 sen (1HFY24: 3.1 sen).

• Results review. On a QoQ basis, revenue increased by 4% mainly due to two temporary vacancies in the previous quarter. New tenancies have since commenced in June, resulting in full occupancy levels throughout 2QFY25. On a YoY basis, revenue grew by 9%, driven by the completed acquisition of Plot 16 Indahpura in Oct 2023 and positive rental reversions, while NPI margins remained stable at 92-93%. Financing expenses increased by MYR400k YoY due to additional borrowings to fund the acquisitions.

• Organic and inorganic growth opportunities. Compared to FY25’s 5% of gross rental income up for renewal, 30% and 20% are due for FY26 and FY27 respectively. As occupancy rates are full, we think downside risks are minimal, and this gives the REIT the opportunity to record higher rental rates. The REIT is also in the process of acquiring MYR120m worth of assets, which should support earnings growth in FY26.

• Gearing. As at end-September, the REIT had a gearing ratio of 14.9%, which we estimate will increase to 27% following the completion of the proposed acquisitions. This is still in the low end for Malaysian REITs under our coverage (average gearing ratio: 32%), and should provide a financing headroom of MYR380m before it hits the 50% gearing limit and needs to raise funds through equity.

• Earnings estimates. We raise our FY26-27 earnings forecasts by 2% and 3% after adjusting our rental reversion assumptions. Our TP incorporates a 2% ESG premium, based on our in-house methodology.

• Key risks: Delayed acquisitions, slowdown in economic growth, and lowerthan-expected rental reversions.

Source: RHB Securities Research - 7 Nov 2024