nvestment Highlights

• We retain our HOLD recommendation on YTL Hospitality REIT (YTL REIT) with an unchanged fair value of RM1.01/unit based on the dividend discount model (DDM). No changes to our neutral 3- star ESG rating (Exhibits 9 & 10).

• YTL REIT’s flattish distributable income of RM71mil in FY22 came in within our expectation, but below consensus. It was 5% below our FY22F distributable income and 30% of streets’ full-year median. Thus, we make no changes to our earnings forecast.

• In 4QFY22, YTL REIT’s gross revenue rose 19% YoY, mainly contributed by higher revenue (+38% YoY) from the Australian portfolio (Exhibit 2). However, its net property income (NPI) increased by only 4% YoY due to higher operating expenses from its hotel assets in Australia.

• On a QoQ comparison, YTL REIT’s gross revenue grew 37% while NPI expanded 27% in 4QFY22. This is mainly contributed by higher revenue (+86% QoQ) from the Australian portfolio, which has more than doubled its revenue per available room to A$171 from A$83 in 3QFY21 (Exhibit 4).

• We have seen an improvement in both the average occupancy rate and average daily rate since 2QFY22. Notably, its 4QFY22 average daily rate has recovered to A$273 vs. the pre-Covid (2019) level of A$271. Meanwhile, its 4QFY22 average occupancy rate of 63% was still lower than the pre-Covid level of 85% (Exhibit 4).

• We are cautiously optimistic about the performance of the Australian portfolio in the upcoming quarters (which contributed 52% of total gross revenue in FY22). This is due to the shift from guaranteed rental income, derived from quarantine contracts executed with the district government, to a tourism-based revenue.

• Recall that YTL REIT has deferred 50% of the lease rental for its Malaysian and Japanese properties (except The Green Leaf Niseko Village) for 24 months commencing 1 July 2020 until 30 June 2022. Repayment of the rental differences will be on a staggered basis within 7 years after 30 June 2022 or over the remaining tenures of existing leases, whichever is earlier (Exhibit 3).

• The portion of the repayment of rental deferrals accounts for 11%/29%/13% of the total distributable income in FY23F/24F/25F.

• YTL REIT declared its final gross DPU of 2.07 sen in 4QFY22. The total FY22 DPU of 3.96 sen represented a distribution payout ratio of 95%. It was 5% lower than the 4.16 sen in FY21 and 50% lower than the 7.87 sen in FY19 (the prepandemic level).

• Nevertheless, we expect a stronger DPU of 8 sen in FY23F with the normalisation of lease rentals for its Malaysian and Japanese properties, coupled with the repayment of rental deferrals.

• The group’s debt-to-asset ratio stayed at 42%, below the 60% statutory threshold required by the Securities Commission.

• As at June 2022, YTL REIT has 52% of borrowings denominated in AUD, 40% in MYR while the remainder is in JPY. As 83% of its borrowings are in floating rates, the interest rate hikes in Malaysia and Australia are expected to result in higher borrowing costs ahead on its borrowings in AUD and MYR (Exhibit 7).

• In 4QFY22, YTL REIT registered a revaluation surplus of RM212 mil from almost all of its hotel assets, with the exception of Pangkor Laut Resort and Cameron Highlands Resort which were flat during the quarter. The main contributors are from its Australian properties, namely Sydney Harbour Marriott (64%) and its Japanese properties, Hilton Niseko Village (20%) (Exhibit 6).

• Since the beginning of 2022, the yield spread between YTL REIT and the 10-year MGS has been narrowing. This was contributed by the surge in the 10-year MGS yield which followed closely the rising trend of the 10-year US Treasury yield (UST). However, we see a stabilisation in the 10-year MGS yield with a decline to 3.9% from the peak of 4.4% following heavy foreign selling in June 2022 and also tapering in inflationary pressures with the retreat in commodity prices from their high levels. FY23F distribution yield is estimated at 8%. We expect YTL REIT to be appealing to yieldseeking investors with its higher yield spread against 10-year MGS (Exhibit 8).

• YTL REIT currently trades at a fair FY23F PE of 12x vs. 2-year average (pre-pandemic, FY18-19) of 13x. Meanwhile, FY23F distribution yield of 8% is unexciting vs. its 4-year average (pre-pandemic, FY16-19) of 9%. Hence, we believe the company’s upside is limited at this stage. We are also concerned about the impact of higher borrowing costs, particularly its borrowings denominated in MYR and AUD, coupled with the weakening of the JPY against the MYR, which could result in higher foreign exchange loss from its Japanese operation.
• The Downside Risks Are: 
  (i) a lower-than-expected occupancy and average daily rates for hotels in Australia; and
  (ii) reintroduction of lockdowns due to the outbreak of a more harmful Covid-19 variant.

Source: AmInvest Research - 2 Aug 2022