Investment Highlights

• We retain our BUY recommendation on YTL Hospitality REIT (YTL REIT) with a higher fair value (FV) of RM1.10/unit (from RM1.01/unit previously) based on our revised dividend discount model (DDM). No changes to our neutral 3-star ESG rating (Exhibits 11 & 12).

• We raise our FY23F/FY24F distributable income by 3%/5% after taking into account a higher average occupancy rate in YTL REIT’s Australian portfolio to 75%/80% from 70%/75%.

• YTL REIT’s share price plummeted since the outbreak of Covid-19 and the announcement of deferral of lease rentals in 2020. However, we expect the share price to recover in 2023 given a highly compelling distribution yield of 11% in FY24F and 9% in FY25F.

• The distribution improvement will be contributed by the normalisation of lease rentals for its Malaysian and Japanese properties and the receipt of rental repayments which have been deferred earlier (Exhibit 7).

• The steady distributable income generated from master lease agreements and repayment of rental deferrals made up 6.0/7.5/6.1 sen or 73%/77%/70% of our FY23F-25F distribution per unit (Exhibit 8).

• Moving ahead, we see minimal risk of discontinuation of its master lease agreements as all of the lessees under the agreement are the subsidiaries or related parties of its major unitholder, YTL Corporation and manager, Pintar Projek (Exhibit 1).

• For YTL REIT’s hotel management business in Australia, we anticipate a strong rebound in its occupancy rate and average daily rate (ADR) with the relaxation of Covid-19 restrictions in 4QFY22 (Exhibits 2 & 4).

• Notably, Australia’s domestic overnight and day trip expenditures by local tourists in 9M2022 have already exceeded 9M2019 levels.

• We believe the growth momentum will continue in its traditionally strongest quarters, 2Q and 3Q, due to increased demand for holiday vacations during the year-end season (Exhibit 3).

• Further upside to distributable income will depend on the return of international tourists. Based on the recent data from Australian Bureau of Statistics, the country registered a stronger average monthly overseas arrival of 1.2mil in OctNov 2022 vs. 1mil in Jul-Sep 2022 (Exhibit 5).

• We project that the average occupancy rate of its Australian portfolio to surpass 70% while its average daily rate (ADR) remain at above AUD270 in 2QFY23F. We also expect the occupancy rate of its Australian portfolio to gradually improve in FY23F/24F and fully recover to pre-Covid level of 85% in FY25F (Exhibit 4). This will be in tandem with Tourism Research Australia’s prediction that visitor arrivals will return to pre-pandemic levels by 2025 (Exhibit 6).

• The recent aggressive policy rate hikes in the United States (US) have caused an increase in the volatility in 10-year MGS yield, which closely followed the rising trend of 10-year US Treasury (UST). However, we anticipate that the uptrend in 10-year UST yield to be tapering off with the expectation that the Federal Reserve will ease off its aggressive rate hikes after the end of 2022 as a result of weaker economic data and softening inflation rate (Exhibit 10).

• Meanwhile, we anticipate the yield spread from FY23F onwards to widen to 4%-6% vs. 5-year median of 2% with the normalisation of lease rentals for its Malaysian and Japanese properties, repayment of rental deferral accounts and the recovery in hotel management business of its Australian portfolio. The stock currently offers distribution yields of 9%-11% in FY23F-25F vs. 5% in FY22 and we expect YTL REIT to be appealing to yield-seeking investors with its higher spread against 10-year MGS.

• YTL REIT currently trades at a compelling FY24F PE of 10x vs. 2-year pre-pandemic (FY18-19) average of 13x. Meanwhile, FY24F distribution yield of 11% is attractive as compared to its 2-year pre-pandemic (FY18-19) average of 8%. It also offers the highest distribution yield of the REITs under our coverage (Exhibit 9)

Source: AmInvest Research - 18 Jan 2023