YTLREIT’s 9MFY17 realized and distributable net profit was above our expectations. Key drivers to the stronger growth came primarily from the Australian portfolio, which saw a 13% yoy increase in 9MFY17 net property income, while commencement of a new step-up cycle of the Master Leases helped to boost net property income. A 3rd interim DPU of 1.8364 sen has been proposed. FY17-19E yields remain attractive at 6.5-7.0% vs. peers’ 5.5-6.0%. Maintain BUY, Price Target at RM1.38.

9MFY17 Results Above Expectations

YTL Hospitality REIT (YTLREIT) reported 3QFY17 realized net profit of RM36.6m (+28.2% yoy, +9.7% qoq) and a 9MFY17 realized net profit of RM93.3m (+28.3% yoy). Based on an annualized 9MFY17 distributable income of RM125.6m, the year-to-date results are above our and street estimates by 10%. 3QFY17 net property income (NPI) of RM57.3m was flat qoq but saw a 10.4% jump yoy, largely underpinned by the improved Australian hotel portfolio revenues, since 2Q17. Hence, this have helped to boost the overall 9MFY17 net property income of YTLREIT to RM161.8m (+6.7% yoy). Meanwhile, the Malaysian portfolio saw some marginal increases in lease rental revenue (+1.5% qoq, +3.8% yoy) and NPI (+1.6% qoq, +4% yoy) subsequent to the commencement of a new step-up cycle since last Nov16. YTLREIT has proposed a 3rd interim DPU of 1.8364 sen, of which is slightly diluted vs. 3Q16 at 1.9175 sen (due to the enlarged share base).

Maintain BUY and PT of RM1.38; FY17-19E Yields at 6.5-7.0%

We maintain our BUY rating on YTLREIT, at a 10-year Dividend Discount Model (DDM)-derived price target of RM1.38 (based on cost of equity of 8.0%). We like YTLREIT due to its steady Master Leases, which eliminates downside risks of fluctuations in hotel industry revenue while the Australian Marriott hotel portfolio enable shareholders to benefit from the more robust market room rates. FY17-19E yields at 6.5-7.0% vis-à-vis peer average at 5.5-6.0%.

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

Source: Affin Hwang Research - 26 May 2017