YTLREIT’s FY17 realized net profit was in-line with our expectation. Expansion in the Australian portfolio’s NPI (FY17: +9.3% yoy) and commencement of a new step-up cycle of the Master Lease portfolio helped to boost the group’s net property income (+5.4% yoy). Nonetheless, performance in 4Q17 was weaker qoq due to more subdued operating results of the Australian portfolio. A final DPU of 1.93 sen has been proposed, with cumulative DPU at 8.08 sen (FY16: 7.89). YTLREIT’s FY18-20E yields remain attractive at 7.0-7.5% vs. peers at 5.0- 5.5%. Maintain BUY, with unchanged PT at RM1.55.

FY17 Realized Net Profit Within Expectations, Above Consensus

YTL Hospitality REIT (YTLREIT) reported a 4QFY17 realized net profit of RM26.7m (+13% yoy, -27% qoq) while FY17 realized net profit amounted to RM120m (+16.7% yoy). Results were in-line with Affin’s estimate of RM114m, but above consensus. The weaker 4QFY17 net property income (NPI) of RM47.8m (-16.5% qoq, though +1.0% yoy) was affected by the Australian hotel portfolio, which saw a sequential decline in revenue and NPI (-8.8% qoq and -33% qoq respectively). We believe that this was due to additional expenses incurred for Sydney Harbour Marriott while Brisbane Marriott could be facing weaker occupancy rates. Nonetheless, the REIT’s overall performance in FY17 was underpinned by a new step-up cycle of the Master Lease portfolio (since Nov 16) as well as a stronger currency effect of the AUD on the Australian portfolio’s NPI (+9.3% yoy).

Maintain BUY and PT of RM1.55; FY18-20E Yields at 7.0-7.5%

We maintain our BUY rating on YTLREIT, with a 10-year Dividend Discount Model (DDM)-derived price target of RM1.55 (based on cost of equity of 8.1%, RFR at 4.0%). We like YTLREIT for its steady Master Leases, which eliminates downside risks to fluctuations in the hotel industry revenue while the Australian Marriott hotel portfolio enables shareholders to benefit from the more robust market room rates. Shareholders are also expected to enjoy higher earnings from FY18 onwards given the proposed acquisition of Majestic Hotel (RM380m, through debt-funding).

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 debtrefinancing rates.

Source: Affin Hwang Research - 5 Sept 2017