New Japan Hotel Cushions Soft Australian Profit

We reaffirm our BUY rating on YTL Hospitality REIT (YTLREIT) with a higher DDM-derived TP of RM1.38 (from RM1.32) after incorporating the earnings contribution from its recently-acquired Green Leaf Niseko Village hotel. With an initial gross yield of 5.25%, against a borrowing cost of c.1%, we expect the deal to be yield accretive. Elsewhere, we have trimmed our profit forecasts for the Australian hotels, in view of the lower-than-expected RevPar in YTD FY19E. Overall, we are lifting our FY19-21E distributable EPU by 0.5-2.9%. At a 6.8% FY19E yield, YTLREIT’s valuation looks attractive, in our view. Reaffirm BUY call.

Purchase of Green Leaf Niseko Village Hotel Closed on 26 September

To recap, YTLREIT has acquired from YTL Corporation Berhad the Green Leaf Niseko Village hotel located in Niseko-cho, Hokkaido, for JPY6.0bn (equivalent to RM222.5m). The 200-room, 5-storey hotel will be leased to the vendor under a 30-year lease agreement, with an option to renew for a further term of 30 years. The initial annual rental payment is JPY315m for the first 5 years, with a step-up provision of 5% every 5 years. With an initial gross yield of 5.25%, against a borrowing cost of c.1%, we expect the acquisition to contribute positively to YTLREIT’s earnings per share.

Softer Than Expected Australian Hotel RevPAR

Elsewhere, the revenue per available room (RevPAR) for YTLREIT’s Australian hotel slipped by 3.3% yoy in 1Q FY19 due to lower average hotel occupancy of 83.6% (from 87.7% in 1Q FY18). The dip in average hotel occupancy is attributable to the renovation at Brisbane Marriott Hotel (targeted completion in early-CY2019) and lower take-up rates for its Sydney and Melbourne hotels. While we remain positive on its Australian hotels’ profitability, their FY19E contributions may come in below our earlier forecasts due to lower-than-expected growth in average day rate (ADR).

Fine-tuning Up Our FY19-21E Distributable Earnings by 1-3%

We lift our FY19-21E distributable earnings by 1-3% after incorporating: (i) the earnings contribution from Green Leaf Niseko Village hotel; (ii) lower ADR growth of 1.0-1.8% yoy (from 2% yoy) for its Australian hotels; (iii) lower Australian hotel occupancy rates of 84-86% (from 85-86%); and (iv) updates on our financial statements based on its latest FY18 Annual Report. Downside risk: adverse health of the Australia hotel market, which accounts for c.40% of YTLREIT’s net property income in FY19E, on our forecasts.

Reaffirm BUY Call With a Higher Target Price of RM1.38

We reaffirm our BUY rating on YTLREIT with a higher DDM-derived 12- month target price of RM1.38 (from RM1.32). We are positive on the acquisition of Green Leaf Niseko Village hotel. In addition to immediate earnings accretion, the asset provides long-term earnings visibility and lifts the net property income (NPI) contributions from the assets under master leases to 61% (from 60%). All in, we continue to like YTLREIT for its solid earnings outlook and attractive FY19E yield of 6.8%.

Key Risks: Australian Hotel Market, Forex, Interest Rate Hike(s)

Key downside risks to our positive view include: (i) the health of the Australia hotel market, which is dependent on many factors such as tourist arrivals, business confidence, economic growth and supply of hotels; (ii) the AUDMYR exchange rate (Affin Hwang’s forecast: RM2.95/AUD); and (iii) interest rate hike(s). We are not expecting any hike in Malaysia’s Overnight Policy Rate in 2019. Any unexpected increase in borrowing costs would weaken YTLREIT’s profitability.

Source: Affin Hwang Research - 31 Dec 2018