Investment Highlights

• We maintain BUY on YTL Hospitality REIT (YTL REIT) with an unchanged fair value (FV) of RM1.11/unit based on dividend discount model (DDM) (Exhibit 9). No changes to our neutral 3-star ESG rating (Exhibit 10).

• The FV implies FY24F distribution yield (excluding deferred repayment of 2.7 sen) of 6%, at parity to its 5-year median. Recall that a portion of the rental income for its Malaysian and Japanese properties (except The Green Leaf Niseko Village) were deferred for 24 months commencing 1 July 2020 until 30 June 2022. The deferred rental will be repaid over the next 7 years (Exhibit 3).

• We made no changes to our earnings forecasts as YTL REIT’s 1QFY24 adjusted distributable income of RM36mil came in within our expectation but above consensus’. It was 22% of our FY24F earnings and 36% of street’s.

• In 1QFY24, both YTL REIT’s gross revenue and net property income (NPI) rose 17% YoY, mainly contributed by higher revenue (+27% YoY) from the Australian portfolio (Exhibit 2). The average daily rate (ADR) for the Australian portfolio expanded 5% YoY to AUD292 in 1QFY24, while average occupancy rate grew significantly to 82% in 1QFY24 from 66% in 1QFY23.

• Despite stronger gross revenue and NPI YoY in 1QFY24, distributable income declined 1% YoY due to increased finance cost.

• On a QoQ comparison, YTL REIT’s gross revenue rose 11% while NPI improved 14% in 1QFY24. This was mainly contributed by international events held in Australia, which led to increase in both occupancy rates (+8.5%- point QoQ) and ADR (+5% QoQ) of its Australian portfolio.

• Historically, 1Q and 4Q have been the weakest quarters for its Australian portfolio, with ADR lower by 9%-17% compared to peak quarters (2Q and 3Q) (Exhibit 6). Moving forward, we anticipate ADR to rebound in 2QFY24, supported by festive and summer holiday seasons following the similar trend of previous financial years.

• No income distribution has been declared in 1QFY24 due to its semi-annual distribution policy.

• The portion of the repayment of rental deferrals accounts for 29%/13%/13% of total distributable income in FY24F/FY25F/FY26F.

• As at 30 September 2023, YTL REIT has 52% of borrowings denominated in AUD, 40% in MYR and the remainder in JPY. As 96% of its borrowing is in floating rates, the interest rate hikes in Malaysia and Australia are expected to result in higher borrowing costs in MYR and AUD (Exhibit 7). Nevertheless, we expect no further increase in OPR given that our in-house economist’s full-year expectation of OPR at 3% has already materialised. Meanwhile, we anticipate that the interest rate hike cycle in Australia has reached its tail-end. Bloomberg consensus estimates has shown that the Australian cash rate is expected to peak at 4.48% on 2QCY24 from its current level of 4.35%.

• Our in-house economist anticipates the US Fed fund rate to peak between 5.5%-5.75% by 4QCY23 from current levels of 5.25%-5.5%. We expect the uptrend in 10-year US Treasury yield to taper off after a pause in the Federal Reserve’s rate hikes in 4QCY23. Our in-house economist also expects the Federal Reserve to start cutting interest rate in mid-2024 by 75-100bps. This would eventually bring the Fed fund rate to 4.5%-4.75% by the end of 2024.

• 10-year MGS yield is projected by our economics team at 3.95% in 4QCY23 with a gradual decline to 3.8% by 4Q2024. However, we do not rule out the possibility that 10-year MGS yield could be lower than our projection of 3.8% in 2024 should there be an earlier-than-expected Fed pivot on US interest rates.

• We like YTL REIT for its stable recurring rental income and minimal occupancy risk for its hotel properties in Malaysia and Japan, secured by master lease agreements. From FY24F onwards, we anticipate the yield spread against 10-year MGS to widen to 5%-6% vs. 5-year median of 2% with the normalisation of lease rentals for its Malaysian and Japanese properties and repayment of rental deferral accounts, which will translate into higher FY24F-26F distribution yields of 9%. We expect YTL REIT to be appealing to yield-seeking investors with its higher yield spread against 10-year MGS (Exhibit 8).

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

Source: AmInvest Research - 24 Nov 2023