Investment Highlights

• We maintain BUY on YTL Hospitality REIT (YTL REIT) with a higher fair value (FV) of RM1.26/unit (from RM1.11/unit previously) after reducing the 3-year beta in the equity cost for our revised WACC of 7.6%, reflecting improving sentiments in both the Malaysian and Australian hospitality segments . No changes to our neutral 3-star ESG rating .

• The FV implies a FY25F distribution yield of 7%, at parity to its pre-pandemic (2018-2019) median.

• Maybank Trustees, as the trustee for YTL REIT, entered into a conditional sale and purchase agreement to acquire Syeun Hotel in Ipoh for RM55mil cash, which represents a 5% discount to its market value of RM58mil, as ascribed by valuer, Savills (Malaysia).

• The property to be acquired is located in Perak’s Ipoh , comprising:
  
  (i) a 48,857 sq ft parcel of 999- leasehold land and a 290-room 4-star hotel, and
  
  (ii) plant & machinery, operating equipment (including all generators, air conditioners, lifts and escalators), office equipment, operating assets, furniture, fixtures and fittings.

• Upon completion of the acquisition in 2HFY24, YTL REIT will lease the property to a hotel operator within the YTL group under a variable rental arrangement. The arrangement allows YTL REIT to participate in the income to be generated from the property.

• We maintain our forecast for now pending further clarification on the details of the variable rental arrangement. This includes details such as the fixed rent and portion of variable component.

• Nevertheless, by applying a property yield of 6.1%, derived from the average property yield of its Malaysian assets, we estimate the property to contribute a minimum net property income (NPI) of RM3.4mil, representing 1% of YTL REIT’s FY24F NPI.

• The acquisition will be wholly funded by borrowings. Upon completion of acquisition, YTL REIT’s FY24F debt-to-asset ratio will slightly increase to 0.43x from 0.42x.

• Syeun Hotel commenced operations on 24 October 1993. However, it ceased operations on 31 May 2020 due to challenging business conditions experienced during the movement control order (MCO) period. Presently, the property stands vacant. YTL REIT intends to renovate the property and has proposed to reopen it under AC Hotels by Marriott brand. The hotel is expected to open in early 2025.

• The property is situated in the heart of Ipoh's city centre, surrounded by various notable landmarks such as Ipoh Parade, Ipoh Convention Centre, City Council of Ipoh, Angsana Ipoh Mall, Hospital Raja Permaisuri Bainun, Pejabat KWSP Ipoh, KPJ Ipoh Specialist Hospital, Octagon Ipoh, Wisma Taiko, UTC Perak, Universiti Kuala Lumpur Royal College of Medicine Perak and The Majestic Imperial Tower Ipoh.

• We view this acquisition positively, particularly due to its strategic location as well as the variable component, which positions YTL REIT to capitalise on the anticipated resurgence in tourism activities in Malaysia. The Malaysian government’s initiatives such as the enhancement of visa-on-arrival facilities, social visit passes and multiple entry visas are expected to bolster Tourism Malaysia's 2024 projection of international tourist arrivals in Malaysia to grow 24% YoY to 20mil.

• YTL REIT currently trades at a FY25F P/E of 13x vs. 2-year pre-pandemic (FY18-19) average of 17x. Meanwhile, its FY25F distribution yield of 7.6% is attractive as compared to current 10-year MGS yield of 3.8%.

Source: AmInvest Research - 8 Feb 2024