Investment Highlights

• We retain our HOLD recommendation on YTL Hospitality REIT (YTL REIT) with an unchanged DDM-based fair value of RM1.01/unit. Our DDM valuation assumptions are based on a WACC of 8.7% and a terminal growth rate of 0.7% (Exhibit 4). We make no changes to our FY22F–24F distributable income forecasts and 3-star ESG rating (Exhibit 7).

• The group reported a distributable income of RM18.2mil (-4% YoY) in 3QFY22. This amounted to a distributable income of RM53.9mil (+1% YoY) for 9MFY22, which came in within our expectations, but below consensus. It accounted for 72% of our FY22F distributable income and 47% of street forecast.

• On a QoQ comparison, YTL REIT’s gross revenue plummeted by 14% to RM78mil while the net property income (NPI) tumbled by 20% to RM45mil in 3QFY22 (Exhibit 1). The drop was mainly due to lower revenue (-27% QoQ) and normalised net property income (-75% QoQ) from the Australian portfolio after the cessation of guaranteed rental income with the expiry of the government’s isolation group business programme. Recall that the Australian government guaranteed an income of 70% occupancy rate and a slightly higher daily rental rate under the programme, which was reflected in the hotel’s NPI.

• The group did not declare a distribution in 3QFY22 amid a change in its distribution frequency to a semi-annual payout from FY2021 onwards.

• YoY, YTL REIT’s gross revenue fell 2% to RM78mil and NPI dropped 8% to RM45mil in 3QFY22, mainly dampened by lower revenue (-4% YoY) and income (-52% YoY) from the Australian portfolio.

• The group’s debt-to-asset ratio stayed at 40.4%, below the 60% statutory threshold. Yet, we foresee greater borrowing costs ahead with the anticipation of further interest rate hikes as 79.6% of its borrowings are in floating rates. Hence, we project a higher financial cost of 4.2% for FY23F.

• Moving forward, rental deferment to tenants in Malaysia and Japan is likely to be discontinued. This is due to the reopening of borders in Malaysia on 1 April 2022 and the Japanese government’s test trial to reopen its borders to foreign tourists on 24 May 2022.

• Distributable income is anticipated to increase in FY23F supported by the repayment of the rental deferrals granted to tenants earlier on a staggered basis (Exhibit 3).

• We are cautiously optimistic about the performance of the Australian portfolio in the upcoming quarters (which contributed 44% of total gross revenue in 3QFY22). This is due to the shift from guaranteed rental income, derived from quarantine contracts executed with the district government, to a tourism-based revenue.

• We remain cautious on YTL REIT due to: (i) the recovery in the Australian portfolio’s average occupancy rate and revenue per available room which could remain soft in the near term; (ii) the bumpy outlook of the travel and tourism sector as higher inflationary pressure may impact consumer spending which includes expenditure on leisure activities; and (iii) declining yield spread against the 10-year MGS due to higher interest rate.

• The downside risks are: (i) a lower-than-expected occupancy rate and average daily rate for hotels in Australia; (ii) deeper contraction in the yield spread against 10-year MGS amid a higher-than-expected increase in interest rate; and (iii) reintroduction of lockdowns due to the outbreak of a more harmful Covid-19 variant.

Source: AmInvest Research - 27 May 2022