YTLREIT’s 1QFY18 realized net profit was in line with our expectations. Expansion in the Australian portfolio’s NPI (1QFY18: +26.5% yoy) and commencement of a new step-up cycle of the Master Lease portfolio helped boost the group’s net property income (+16.1% yoy). A 1QFY18 DPU of 1.97 sen has been proposed (1QFY17: 2.05 sen). YTLREIT’s FY18-20E yields remain attractive at 6.9-7.4% vs. peers at 6.67-6.92%. Maintain BUY, with PT at RM1.55.

1QFY18 Realized Net Profit Within Expectations, Above Consensus

YTL Hospitality REIT (YTLREIT) reported a 1QFY18 realized net profit of RM33.3m (+42.0% yoy; +24.5% qoq), in line with Affin’s full-year estimate of RM140.9m and the consensus. 1QFY18 net property income (NPI) of RM55.1m (+15.3% qoq, +16.1% yoy) was supported by the Australian hotel portfolio, which saw a sequential expansion in revenue and NPI (+10.8% qoq and +32.7% qoq respectively) while the Master Lease portfolio (51.6% of 1QFY18 net property income) saw revenue and NPI grow by 2.7% qoq and 7.7% yoy. The overall occupancy rate at the Australian hotel portfolio improved subsequent to the completion of the Sydney Harbour Marriott refurbishment. YTLREIT’s income stream in the subsequent quarters of FY18 will likely be underpinned by: i) additional contribution from the Majestic Hotel (acquisition completed on 3 Nov 17); ii) the step-up cycle of +5% in the Master Lease portfolio (since Nov 16) and the effects of a stronger AUD on the Australia portfolio.

Maintain BUY and PT of RM1.55; FY18-20E Yields at 6.9-7.4%

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

Source: Affin Hwang Research - 23 Nov 2017