Investment Highlights

• We reaffirm our BUY recommendation on YTL Hospitality REIT (YTLREIT) with an unchanged fair value of RM1.32/unit, based on a DDM valuation. (cost of equity: 7.7%, terminal growth rate:1.5%, and risk free rate: 4.2%)

• At a glance, YTLREIT reported a net loss of RM22.7mil (>-100.0% YoY and >-100.0% QoQ) for 3Q17. However, the net losses were masked by noncash items such as depreciation and unrealised foreign translation on the Australian dollardenominated term loan.

• After adjusting the non-cash items, YTLREIT reported a distributable income of RM33.6mil (+29.8% YoY and +13.8% QoQ) for 3Q17 and DPU of 1.83 sen, vs. 2.26sen in 2Q16 driven by interest savings. This brings the DPU in 9MFY17 to 6.15 sen vs 5.75 sen in 1H16.

• Revenue was registered at RM118.3mil for 3Q17, bringing the 9MFY17 total to RM338.5mil (+4.1% YoY). Revenue came within our expectations – making up 79.1% of our full-year revenue estimates of RM428.0mil and 78.3% of consensus. Its solid revenue growth was attributed to a step-up in lease rental income from The Residences at Ritz-Carlton and other Malaysian properties (except for JW Marriott Hotel KL) and the appreciation of AUD.

• Net property income was within our expectations, making up 74.4% of our full-year estimates of RM217.7mil and 78.6% of consensus.

• Net property income was 6.8% higher YoY in 9MFY17 due to cost savings on the Australian properties and appreciation of Australian dollar and a step-up in lease rental income from the The Residences at The Ritz-Carlton, KL and other Malaysian assets except for JW Marriott KL. Our sensitivity analysis indicates that for every AUD/RM0.10 of the AUD strengthening, it increases YTLREIT’s FY17F DPU by 1.23%. As a result, 3Q17 registered a blended NPI margin of 48.5% (2Q17: 47.9%). The NPI margin of Australian operation as at 3Q17 has remained stable at 33.8% (2Q17:34.5%)

• YTLREIT’s debt-to-asset ratio as at 3Q17 is at ~35.4% (2Q17: 40.8%) after it pared down its borrowings. This will provide YTLREIT the flexibility to fund larger acquisition opportunities through borrowings.

• We make no changes to our DPU estimates. YTLREIT is expected to continue growing organically, underpinned by healthy rental reversion.

• Maintain BUY on YTLREIT with an unchanged DDMbased target price of RM1.32/share, which implies an FY18F gross yield of 5.9%.

Source: AmInvest Research - 26 May 2017