Investment Highlights

• We maintain our BUY recommendation on YTL Hospitality REIT (YTL REIT) with a lower fair value of RM1.26 from RM1.31 based on a target yield of 7% over its FY23 distributable income. We cut our FY21–FY22 distributable income by 48% and 41% respectively while raising that of FY23 by 13%.
• YTL REIT’s market cap fell by RM255mil or 15.8% yesterday following the rental variation requested by tenants. YTL REIT is offering a discount of 50% for two years in a bid to provide relief to tenants until 30 June 2022. Consequently, tenants will pay the difference between the original rentals and reduced rentals on stages after the rental adjustment period or over the remaining tenures of the existing leases (Exhibit 1).
• We reckon the market has overreacted over the rental variation. Based on our estimates, the loss of distributable income in its DCF value of FY21–FY29 (RM104.7mil) is much lower than the RM255mil fall in market cap as shown below. Our DCF valuation is based on a discount rate of 7%.
• The rental variation does not involve any rental waiver as the rental difference will be paid to YTL REIT over time. Following the adjusted rentals, YTL REIT’s FY21–FY22 distributable income will be reduced by 48% and 41% respectively. Nonetheless, the repayment beginning 2023 will result in stronger distributable income in FY23 (+13%) to RM155.3mil and a further 15% to RM179.3mil in FY24.
• We have lowered our fair value to RM1.26 per share from RM1.31 based on a target yield of 7% over its FY23 distributable income. We increase our target yield to 7% from 5% as we factor in the loss of time value of money.
• We believe the stock is oversold and see the recent selldown as a buying opportunity. At its current price, the stock offers a potential upside of over 50% and decent dividend yield of 4.1%, 5.3% and 10.2% for FY21–23 respectively. Maintain BUY.

Source: AmInvest Research - 4 Aug 2020