AmInvestment Bank, 21 February 2020

Thong Pak Leng, Analyst

Fair Value: 1.63

Investment Highlights

We maintain our BUY recommendation on YTL Hospitality REIT (YTL REIT) with a higher fair value of RM1.63 from RM1.56. Our fair value revision is based on: (i) a revised target yield of 5.0% (from 5.5%); and (ii) rolling over our valuation to FY21 distributable income. We lower our target yield to 5.0% from 5.5% in view of the possibility that BNM may cut interest rates. We trim our FY20–22F distributable income forecasts by 5% each as we factor in higher operating expenses.

YTL REIT’s 1HFY20 distributable income of RM66.0mil (+2.2% YoY) came in below our expectations but higher than consensus, making up 45% and 54% of our and consensus full-year forecast respectively. Revenue and net property income (NPI) grew by 2.2% and 6.4% respectively mainly due to the stronger performance of Malaysian and Japanese properties. YTL REIT recommended a DPU of 1.91 sen compared to YoY’s 1.94 sen.

1HFY20 distributable income was flattish, mainly due to higher borrowing costs (+4.2%) and income tax (+14.1%).

Malaysian properties contributed a 1HFY20 revenue and NPI of RM70.1mil (+4.4% YoY) and RM66.5mil (+4.3%) respectively. The stronger revenue and NPI was mainly attributed to additional rentals recorded from JW Marriott Hotel KL following the recent refurbishment which was completed in June 2019.

Japanese properties’ 1QFY20 revenue and NPI surged by 26.1% and 34.1% YoY to RM14.2mil and RM11.6mil respectively contributed by the acquisition of Green Leaf Niseko Village Hotel in Sep 2018.

However, Australian properties’ 1HFY20 revenue fell 0.2% to RM167.6mil while NPI grew 4.5% RM55.7mil. Despite stronger room sales, revenue was lower mainly due to weakening of the AUD against the MYR. The improvement in NPI was due to increased operational efficiency and cost savings.

The debt-to-total assets ratio increased to 39% vs. 38% YoY as a result of higher investing activities, but is still below the regulatory threshold of 50%. At the current level, we believe YTL REIT still has some room to gear up for future acquisitions.

We like YTL REIT due to it being a hospitality REIT with exposure in the Australian market that continues to grow. At the same time, it has master leases on properties in Malaysia and Japan that provide steady incomes. Maintain BUY.

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