We reiterate our BUY rating on YTLREIT with a lower DDM-derived price target of RM1.35 after incorporating our revised earnings forecasts and raising the cost of equity. Despite the cut, we continue to like YTLREIT, an underappreciated owner of luxury hotels for its solid earnings outlook - c.49% of YTLREIT’s NPI is contributed by its hotels under long-term leases with high earnings visibility while the other 51% is derived from Australian hotels with a positive outlook. At an 8.0% FY18E yield, YTLREIT looks attractive, offering one of the highest yields amongst its regional peers.

Highest Yielding REIT, Discount to Peers Unwarranted in View Of…

We reiterate our BUY rating on YTLREIT, an underappreciated owner of luxury hotels with an established operational track record. At an 8.0% FY18E yield, YTLREIT looks attractive, offering one of the highest yields amongst its regional peers. Similarly, this REIT’s price-to-book of 0.76x is also among the lowest compared to peers.

… Its Solid Earnings Outlook And…

Approximately 49% of YTLREIT’s 6MFY18 net property income (NPI) was derived from hotel assets under master leases with stable, highly visible earnings streams. The remaining 51% of NPI was contributed by three hotels in Australia that enjoy rising occupancy rates and stable average daily rates. Looking into 2018-19, we are positive on the Sydney hotel market and are neutral on Melbourne and Brisbane’s hotel markets.

… Strong Asset Acquisition Record

YTLREIT has acquired 13 assets post its restructuring in 2011. Twelve of these have seen an increase in market value and most are delivering NPI yields of over 6.5%. YTL Corp has an extensive hotel portfolio. Moving ahead, we expect further asset injections from YTL Corp. In view of its track record, we expect these assets injections, if materialised, should be earnings accretive.

Cutting Earnings / TP on Exchange Rate, Renovation, Cost of Equity

We expect YTLREIT to deliver 12% EPU growth in FY18E, driven by the contribution from Majestic KL and higher earnings from its Australian hotels. However, we are cutting our FY18-20E core profit forecasts by 3- 11%, imputing a stronger Ringgit (vs the Australian dollar) and lower hotel occupancy rates in conjunction with a planned renovation at its Brisbane Marriott hotel. We lower our DDM-derived Target Price to RM1.35 from RM1.61 after incorporating our earnings cut and raising the cost of equity to 8.5% (from 7.9%).

Source: Affin Hwang Research - 28 Mar 2018