Investment Highlights

• We maintained our BUY recommendation on YTL Hospitality REIT (YTLREIT) with an unchanged fair value of RM1.35) based on an unchanged target yield of 6.5%. We keep our FY19-21F distributable income forecasts at RM149.2mil, RM155.5mil and RM160.1mil respectively.

• YTLREIT registered its 1QFY19 distributable income of RM32.8mil (-2.6% YoY). Despite making up 22% of our and consensus full-year forecast, we reckon this to be in line with expectations as we anticipate stronger earnings in the coming quarters with stronger contributions from Green Leaf Niseko Village Hotel in Japan and improving revenue from Australian properties following the completion of refurbishment works.

• 1QFY19 NPI improved by 2.2% YoY to RM56.3mil mainly contributed by the Majestic Hotel KL which was acquired in Nov 2017, but partially offset by weaker performance in Australian Properties.

• Overall, Malaysian properties contributed a revenue and NPI of RM33.6mil (+26.3% YoY) and RM31.9mil (+26.6%) respectively. The stronger revenue and NPI was mainly contributed by The Majestic Hotel KL.

• Australian Properties recorded lower 1QFY19 revenue and NPI of RM76mil (-15.3% YoY) and RM21.4mil (-19.7% YoY) respectively. This is mainly due to refurbishment exercise and the weaker AUD during the quarter.

• Japanese properties revenue grew by 3.2% YoY to 4.2mil contributed by the acquisition of Green Leaf Niseko Village Hotel in Sep 2018. However, NPI fell by 7.4% YoY to RM3.0mil as a result of a one-off cost incurred in the acquisition.

• The debt-to-total assets ratio increased to 37% vs. 31% YoY mainly due to higher investing activities, but is still below regulatory threshold of 50%. At the current level, we believe YTLREIT still has some headroom to gear up for future acquisitions.

• Overall, we are NEUTRAL on the REIT sector over the next 12 months. Prospects for the sector are expected to be subdued as rental reversion opportunities staa muted, affected partly by the oversupply of retail and office spaces.

• Nonetheless, we like YTL REIT due to it being a hospitality REIT with exposure in the Australian market that continues to grow, and at the same time has master leases on properties in both Malaysia and Japan that provide steady incomes.

Source: AmInvest Research - 26 Nov 2018