Lower price target post-placement

Despite a lower price target of RM1.38 (from RM1.60) for YTL Hospitality REIT due to dilution effect post an equity placement exercise, we still maintain our BUY rating given attractive yields of 7.0- 7.6%. Future asset injections remain a catalyst for the REIT.

Lowering Price Target to RM1.38 from RM1.60

We are revising our Price Target for YTL Hospitality REIT (YTL REIT) from RM1.60 to RM1.38 (Fig 1), subsequent to the RM402m equity private placement raised, which was completed on 16 Dec 2016 (comprising 380m new YTL REIT shares). Proceeds from the placement will be utilized to de-gear existing Malaysian bank borrowings (based on a cost-of-debt of 4.9%) and the higher distributable income as a result of the interestsavings will be distributed back to shareholders. Due to the higher cost-ofcapital from the proceeds, as it is based on a cost-of-equity of 8.08% vis-à- vis a cost-of-debt of 4.9% (with the bank borrowings), the distributable income (per unit) to the common equity shareholders of YTL REIT has been diluted by 7.7% for FY17E and 9.0-9.4% for FY18-19E. This is despite an increase of 16-17% in absolute distributable income. In our FY17E forecasts, we have also factored-in administrative cost of RM4m due to placement fees.

Maintain BUY. Lower gearing paves the way for future acquisitions

Maintain BUY on YTL REIT, FY17-19E DPU yields remain attractive at 7.0-7.6% while trading at P/NAV of 0.73x. With a lower gearing of 0.33x anticipated (with the repayment of bank borrowings) vs. 0.44x previously, YTL REIT could gear up by approximately RM617m (based on a 60% limit which was approved by shareholders) for future acquisitions. Compared to peers, YTL REIT’s management could at any time inject mature properties under the stable of YTL Hotels (the hospitality arm of YTL Corp) into YTLREIT. Meanwhile, management is also constantly on the lookout for strategic acquisitions in more robust cities such as London.

Key risks: non-renewal of leases, sharp slowdown in economies

Key risks to our call: i) non-renewal of lease agreements; ii) a sharp slowdown in economic growth, especially in Australia’s key cities; iii) higher debt-refinancing rates; and iv) a steepening of the 10-year MGS yield curve would continue to dampen REIT valuations

Source: Affin Hwang Research - 30 Dec 2016