Investment Highlights

• We maintain our FY21F–FY23F distributable income forecasts and fair value of RM1.26 for YTL Hospitality REIT (YTL REIT), based on an unchanged target yield of 7% over its FY23F distributable income. Maintain BUY.
• YTL REIT reported its 1QFY21 distributable income of RM16.8mil (-37.7% YoY), which came in within our full-year forecasts but below consensus, at 27% and 18% of ours and consensus full-year forecasts respectively.
• 1QFY21 revenue fell by 34.5% YoY mainly due to the Covid-19 pandemic, rental deferment for properties in Malaysia and Japan, and a weaker performance from properties in Australia.
• The drop in its net property income (NPI) of 15.5% YoY to RM53.0mil for the same period is not as severe due, thanks to its tight cost-saving measures, particularly admin expenses. Meanwhile, its distributable income dived by 49.5% to RM16.8mil, dragged by an unrealized loss on foreign exchange. YTL REIT has not declared a distribution for this quarter following its decision to change the income distribution frequency from quarterly to semi-yearly effective 3QFY20.
• Malaysian properties contributed a revenue and NPI of RM36.5mil (+4.1% YoY) and RM34.7mil (+4.3% YoY) respectively in 1QFY21. This is mainly due to the recognition of lease income on a straight line basis over the tenure of the lease following the rental variations, which reduced the lease rentals by 50% for 24 months commencing 1 July 2020 (until 30 June 2022).
• Japanese properties’ 1QFY21 revenue and NPI increased by 3.0% and 5.3% YoY to RM7.4mil and RM6/4mil respectively, contributed by the recognition of lease income on a straight line basis as mentioned above.
• However, Australian properties’ 1QFY21 revenue and NPI tumbled 55.2% and 49.0% to RM35.2mil and RM12.0mil respectively mainly due to the impact of the Covid-19 outbreak which affected the global tourism and hospitality businesses. On a positive note, the Australian properties participated in the Australian government’s programme for self-isolation guests and remained in operations. It has also received subsidy from a programme for job seekers.
• The debt-to-total assets ratio remains stable at 39%, similar YoY, maintaining below the regulatory threshold of 60% (temporary increased limit from 50% up to 31 December 2022 as part of the relief measure implemented by the Security Commission in light of Covid-19). At the current level, we believe YTL REIT still has some room to gear up for future acquisitions.
• We reckon the situation is temporary for YTL REIT and we believe business shall normalize when the pandemic is over. Meanwhile, it has master leases on properties in Malaysia and Japan that provide steady incomes. At the current price, the stock offers a potential upside of over 50% and decent dividend yield of 4.3%, 5.5% and 10.6% for FY21F– 23F respectively. We maintain our BUY recommendation on YTL REIT.

Source: AmInvest Research - 27 Nov 2020