• YTLREIT reported a weak set of results – FY20 realised net profit fell by 11% yoy to RM127m while DPU declined by 15% to 6.71 sen on weakness in its Australian assets.
• However, the results was above market and our expectations due to lower than expected operating costs.
• In view of the 50% rental reduction in FY21-22E and challenging business outlook in the key markets, we cut our FY21-22E distributable EPU by 85% / 72%. Reaffirm SELL rating with a lower target price (TP) of RM0.83.

FY20 realised net profit above expectations

YTLREIT reported a 4QFY20 realised net profit of RM17.9m (-42.5% yoy, -43.6% qoq) while FY20 realised net profit amounted to RM127.1m (-10.7% yoy). Revenue from the master leased assets grew 5.9% yoy in FY20 due to higher contribution from JW Marriott Hotel KL following the refurbishment completed in June 2019 and full year of revenue from Japan’s Green Leaf Niseko Village (acquired in Sep 2018). This was however offset by weak performance from the Australian assets; lower average daily rate (“ADR”) of AUD245 (-9.7% yoy) and lower average occupancy of 73.1% (from 84.9% in FY19) due to the impact of the Covid-19 pandemic and lockdowns. FY20 DPU fell by 14.7% yoy to 6.7sen due to lower distributable EPU and lower payout ratio of 90% (from 100%). Overall, the realised net profit of RM127.1m makes up 111% of our and 117% of the street’s expectations due to lower-than-expected operating costs.

Worst is not over, FY21-22E rental for most properties axed by 50%

Moving into FY21-22E, the lessees for its Malaysian hotels and Japan’s Hilton Niseko Village had appealed, and YTLREIT had granted to (i) reduce the latest rentals by 50% for 24 months, commencing 1 July 2020 – 30 June 2022 (or FY21-22) and (ii) the aforementioned hotels to pay the difference between the original rentals and reduced rentals on a staggered basis within 7 years after the rental adjustment period or over the remaining tenures of the existing leases, whichever is earlier. This unexpected rental reduction should affect YTLREIT’s FY21-22E distributable income and DPU.

Elsewhere, we expect prolonged weakness in the Australian hotel market

Elsewhere, we expect the Australian hotels to continue delivering weak results in 1HFY21 before improving (gradually) thereafter. We turn more cautious on that market after the Victorian government reinforced local lockdowns in June due to the rising number of Covid-19 cases which signals possible prolonged border controls in the country. In FY20 the Australian hotels made up 60% of total revenue (vs FY19: 68%) and 33% of total NPI (vs FY19: 42%).

Cutting FY21-22E distributable EPU by 72-85%

We cut our FY21-22E distributable EPU by 72-85% after incorporating: (i) 50% rental variation in FY21-22E for the Malaysian hotels and Japan’s Hilton Niseko Village; (ii) lower revenue / NPI from the Australian hotels due to prolonged lockdowns as a result of a delayed recovery in tourism activity; and (iii) lower finance costs after the refinancing of its Australian borrowings at lower rates and BNM’s OPR cut. Accounting-wise, the 50% rental variation for FY21-22E (-RM78.2m per annum) has no impact to the group’s reported revenue, NPI and realised net profit. However, this would affect YTLREIT’s distributable net profit, distributable earnings per share, cash flow and hence, DPU.

Maintain SELL with a lower TP of RM0.83

We lowered our DDM-derived price target to RM0.83 (from RM0.95) after incorporating a lower DPU during FY21-22E and incorporating a higher equity risk premium of 10% (from 9.4%) due to its heightened earnings risks and challenging business outlook. We maintain our SELL call on YTLREIT as we remain cautious on YTLREIT’s earnings prospect amidst the ongoing pandemic. Key upside risks: retraction of the rental cut in Malaysian hotels, higher-than expected revenue / earnings from the Australian hotels, strong recovery in Australian tourism activities and strengthening of the AUD against the RM.

Source: Affin Hwang Research - 3 Aug 2020