YTLREIT: Higher rental, improved RevPAR drive earnings recovery

Affin Hwang Investment Bank, May 25, 2023

YTL Hospitality REIT 
BUY
Target Price: RM1.11

• YTLREIT reported a healthy set of results – 9MFY23 distributable income rebounded by 56% yoy to RM84m on the resumption of full rental payments for its Malaysia and Japan properties and improved Australian operations
• Sequentially, 3QFY23 distributable income slipped by 3% qoq to RM26m. The results were a tad below our expectations due to lower-than-expected repatriation from its overseas operations, arising from time lag and higher refurbishment / upfront costs to resume the hotel operations post Covid
• We cut our FY23-25E distributable income forecasts by 3-14%. Maintain BUY with a lower DDM-derived PT of RM1.11 after we incorporate the earnings changes and roll forward our valuation horizon to 2024E 

9M23 distributable income grew by 56% yoy to RM84m, a tad below expectations
YTLREIT reported a healthy set of results – 9MFY23 distributable income grew by 56% yoy to RM84.2m on the resumption of full rental payments for its Malaysia and Japan properties and improved Australian operations. Elsewhere, the Australian hotels also reported a higher 9M23 NPI of RM69.5m (+98% yoy) driven by higher revenue per available room (RevPAR) following the reopening of Australia’s border and strong recovery in tourism / business activities. Nonetheless, the sharp increase in Australian borrowing rates has somewhat dampened the country’s earnings contribution – YTLREIT’s 9M23 interest cost grew by 51% yoy to RM67.6m largely due to increase in the AUD-borrowing costs. Overall, the results were below market and our expectations – 9M23 distributable income only accounted for 61% of our full-year forecast due to: (i)
lower-than-expected repatriation from the overseas operations, arising from time lag and higher refurbishment expenses / upfront costs when the oversea hotels ramped up its post-Covid operations; and (ii) higher-than-expected interest costs

Sequentially, YTLREIT’s distributable income slipped by 3% qoq
Sequentially, YTLREIT’s distributable income slipped by 3% qoq to RM26.2m (+44% yoy). While YTLREIT’s net property income was relatively stable qoq at RM66.9m (+1%), an increase in finance costs (+4%) has likely affected the distributable income.

Cutting FY23-25E forecasts by 3-14%, maintain BUY with a lower TP of RM1.11
We have cut FY23-25E distributable income forecasts by 3-14% after taking into consideration the current RevPAR / operating costs for the Australian operations, incorporating higher finance cost, and higher-than-expected refurbishment / upfront costs for its overseas operations. We lower our DDM-derived 12-month price target to RM1.11 (from RM1.14) after incorporating the earnings changes and rolling forward our valuation horizon to 2024E. Maintain BUY for its attractive FY24-25E yield of 10%.

Key risks to our forecasts
Downside risks to our positive view on YTLREIT would be a sharp rise in interest rates, and lower-than-expected financial performance.

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