Investment Highlights

• We maintain our BUY recommendation with a lower fair value (FV) of RM1.05 (from RM1.11) for YTL Hospitality REIT (YTL REIT). Our valuation is based on a lower target FY23F yield of 6.8% from 7.5%. No adjustment for our 3-star ESG rating (Exhibit 7).

• We cut FY22F–24F distributable income estimates by 14%, 5%, and 3% to RM77mil, RM149mil, and RM176mil respectively. This is after lowering our revenue assumptions for the group’s hotel assets.

• YTL REIT’s 1HFY22 distributable income of RM35.7mil (+4.5% YoY) came in below our and consensus full-year forecasts. It accounted for 40% and 31% of our and consensus full-year estimates. The variance was mainly due to higher-than-expected operating expenses from its hotels in Australia.

• On a QoQ comparison, 2QFY22’s gross revenue slid 0.5% to RM89.8mil. Meanwhile, the net property income declined by 4.8% QoQ to RM55.4mil weighed down by higher operating expenses from its hotel assets in Australia coupled with the lower rentals given to the tenants for hotels in Malaysia and Japan, under the various rental programmes (Exhibit 2).

• 1HFY22’s gross revenue and net property income (NPI) improved 14.1% and 11.2% YoY to RM179.9mil and RM113.5mil respectively (vs. RM157.8mil and RM102mil in 1HFY21). This was mainly supported by an improved gross revenue (+31.9% YoY) and net property income (+56.8%YoY) in Australia’s hotels which benefited from quarantining individuals with close contacts or symptoms of Covid under the government's isolation group business programme. YTL REIT’s 1HFY22 distributable income rose 4.5% YoY to RM35.7mil, boosted by an unrealized FX gains (Exhibit 2).

• YTL REIT declared its first interim gross DPU of 1.88 sen in 2QFY22 (vs. 1.81 sen in 2QFY21). We expect a stronger DPU yield of 8.7%–10.3% in FY23–24F, after taking into account of repayments from F23 to FY29F for rentals which have been deferred (Exhibit 1 & 8).

• YTL Hospitality REIT’s net gearing ratio improved 3.9% to 74.1% in 1HFY22 from 77.1% in 1HFY21.

• Earnings for FY22F will remain weak in the near term due to reduced rentals given to tenants until 30 June 2022. Nevertheless, from 30 June 2023 onwards, the portion of rentals lowered will be required to be repaid by the tenants on a staggered basis. Hence, rental incomes are expected to increase moving forward. Also, we like YTL REIT for its stable recurring rental income and minimal occupancy risk for its hotel properties in Malaysia and Japan where master lease agreements have been executed.

• The downside risks to our assumption are: (i) declining yield spread against the 10-Y MGS (Exhibit 4); (ii) lowerthan-expected occupancy rates in Australian’s hotel; and (iii) a slower-than-expected recovery in the travel and tourism industry

Source: AmInvest Research - 25 Feb 2022