Investment Highlights

• We reaffirm our BUY recommendation on YTL Hospitality REIT (YTLREIT) after the results’ briefing yesterday with a higher fair value of RM1.39/unit from RM1.37/unit, after we rolled over to FY18 and introduce our FY20F forecast based on a DDM valuation. (cost of equity: 7.7%, terminal growth rate:1.5%, and risk free rate: 4.2%)

• We make slight changes to our DPU by - 0.25%/0.45%/-0.97% to 8.0 sen/8.60 sen/8.80 sen in FY18F/FY19F/FY20 estimates after accounting for higher occupancies in Sydney, Melbourne and Brisbane. For Melbourne and Sydney, we increased our average daily rental (ADR) by 5% but reduced our ADR assumption in Brisbane as the management is prioritizing its market share. Nevertheless, we expect the Brisbane Marriott to enjoy higher occupancy in FY18 due to Commonwealth Games 2018 in Gold Coast which to be held in April.

• Revenue was registered at RM111.1mil for 4QFY17, bringing the FY17 total to RM449.6 mil (+5.5% YoY). Revenue came in above our expectations – making up 104.9% of our full-year estimates of RM428.0 mil. Its solid revenue growth was attributed to a step-up lease rental income from The Residences at RitzCarlton and other Malaysian properties (except for the JW Marriott Hotel KL) and the appreciation of the Australian dollar.

• After adjusting for non-cash items, YTLREIT reported a distributable income of RM32.9mil (+16.1% YoY and +5.1% QoQ) for 4QFY17 driven by higher rental reversion, cost savings from interest and the appreciation of the Australian dollar. However, YTLREIT reported a DPU of 1.93 sen vs. 2.14 sen in 4QFY16 due to a dilution in share placement bringing the DPU in FY17 to 8.08 sen vs. 7.89 sen in FY16.

• Net property income (NPI) was within our expectations at 96.3% of our full-year estimates of RM217.7 mil. The NPI was +0.8% YoY but -16.9% QoQ in 4QFY17 due to a one-off higher land tax in Melbourne. Nevertheless, the management is in the midst of appealing the issue with the authority. As a result, 4QFY17 registered a blended NPI margin of 42.9% (3QFY17: 48.5%). The NPI margin of Australian operation as at 4QFY17 has declined to 24.37% (3Q17: 33.8%). We expect the margin to normalize in the next quarter.

• YTLREIT is expected to continue growing organically, underpinned by healthy rental reversion.

Source: AmInvest Research - 8 Sept 2017