Investment Highlights

• We maintain our BUY recommendation on YTL Hospitality REIT (YTL REIT) with an unchanged fair value of RM1.36. We make no changes to our FY20–FY22 distributable income forecasts.

• YTL REIT’s 9MFY20 distributable income of RM100.1mil (+1.7% YoY) came in within our and market expectations despite making up 90% and 87% of our and consensus full-year forecast respectively as we expect a weaker 4Q due to the impact of the Covid-19 outbreak.

• 9MFY20 revenue fell by 4.2% YoY mainly due to travel restrictions in Australia which have impacted the tourism and hospitality business in the country. However, this was mitigated by businesses in Malaysia and Japan which are largely unaffected due to their master lease arrangements. Nonetheless, its net property income (NPI) grew by 16.3% to RM190.9mil for the same period due to tight cost-saving measures. 9MFY20 distributable income was flattish (+1.7%), mainly due to higher borrowing costs (+3.1%) and income tax (+4.7%). YTL REIT changed its income distribution frequency from quarterly to semi-annually beginning 3QFY20.

• Malaysian properties contributed a 9MFY20 revenue and NPI of RM105.2mil (+4.5% YoY) and RM99.7mil (+4.5%) respectively. The stronger revenue and NPI was mainly attributed to additional rentals recorded from JW Marriott Hotel KL following the refurbishment which was completed in mid-2019.

• Japanese properties’ 9MFY20 revenue and NPI surged by 16.7% and 19.8% YoY to RM21.2mil and RM17.6mil respectively contributed by Green Leaf Niseko Village Hotel which was acquired in Sep 2018.

• However, Australian properties’ 9MFY20 revenue and NPI fell 9.1% and 11.1% to RM230.3mil and RM73.7mil respectively mainly due to the impact of the Covid-19 putbreak which affected the global tourism and hospitality businesses.

• The debt-to-total assets ratio remained stable at 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 make no changes to our FY20–FY22 numbers. To recap, we have cut our FY20–FY21 distributable income forecasts by 17% and 15% respectively in our previous sector reports dated 19 March, 9 and 30 April 2020 to reflect the impact of the Covid-19 outbreak and its spilled over effects to the economy. We reckon this is temporary for YTL REIT and believe business shall normalize once the pandemic is over. At the same time, it has master leases on properties in Malaysia and Japan that provide steady incomes. At the current price, the stock offers a potential upside of over 20%. Maintain BUY on YTL REIT.

Source: AmInvest Research - 17 Jun 2020