• YTLREIT reported a distributable income of RM16.8m, a 37.7% decline yoy due to the 50% rental variation applied to its hotels in Malaysia and Japan (Hilton Niseko).
• However, the results were above expectations due to lower-than-expected operating costs.
• In view of the better performance from the Australian hotels and improvement in the hospitality industry following positive developments on the Covid-19 vaccines, we lift our earnings forecasts and lower our cost of equity to 11.20% from 11.80% . Upgrade to HOLD with a DDM-derived target price of RM0.84.

1Q21 distributable income fell by 49.5% due to rental deferment

YTLREIT has granted rental deferments for its hotels in Malaysia and Japan (Hilton Niseko Village) where 50% of the FY21-22 rentals would be deferred, to be repaid on a staggered basis within 7 years or over the remaining tenures of the existing leases. As a result, a lower distributable income was recorded in 1Q21 at RM16.8m, a decline of 49.5% yoy. Its revenue fell by 34.5% yoy to RM79m due to lower contribution from the Australian hotels where businesses had been affected by international / interstate border closures. The NPI margin improved to 67% (+15ppt yoy), however, due to lower opex incurred at the Australian hotels. Overall, the results were within street expectations but above ours. The earnings beat is attributable to the stronger-than-expected NPI margin from the Australian operations.

Sequentially, Australian hotels’ NPI has recovered from the 4Q20 low

Sequentially, the Australian hotels recorded a higher revenue (+29% qoq), attributable to its participation in the Australian Government’s isolation programmes. As a result, the Australian hotels’ NPI has improved to RM12m (from RM4.6m), driven by higher revenue and government subsidies from its jobseeker programme.

Upgrade to HOLD with a higher DDM-derived TP of RM0.84

We upgrade YTLREIT to a HOLD with a higher DDM-derived 12-month target price of RM0.84 as we lift our FY21-23E distributable EPU to incorporate a faster recovery in the Australian tourism activity and lower operating costs. We have also lowered our equity risk premium to 11.20% (from 11.80%) as we turn more positive on the hotels’ earnings outlook given the possible availability of Covid-19 vaccines in 2H21. Key upside / downside risks: further deferment of rental repayment for the Malaysian hotels, higher / lower-than expected earnings from the Australian hotels, and strengthening / weakening of the AUD against the RM.

Source: Affin Hwang Research - 27 Nov 2020