PETALING JAYA: Affin Hwang Capital is maintaining a “buy” call on YTL Hospitality REIT with a higher target price of RM1.46 after lifting its earnings forecasts and incorporating a lower cost of equity.
“At 6.4% FY20 yield, YTLREIT’s valuation looks attractive,” it said.
The research house highlighted that YTL REIT’s master leases, which has long contract tenure and stable rental income with a 5% step-up provision every five years, accounts for 60% of its FY20E net property income.
Furthermore, the research house expects the REIT to grow its FY20 distributable earnings per unit (EPU) by 10% driven by a full-year contribution from Green Leaf Niseko Village acquired in September 2018, earnings recovery at Brisbane Marriott Hotel following renovation works and rental revision at JW Marriott hotel.
“The rental growth should more than compensate a higher finance costs,” it said.
Moving into FY21, Affin Hwang foresees YTL REIT to deliver another 9% earnings growth, driven by lower finance cost and stronger Australian dollar against the ringgit.
It observed that Australian banks’ lending rates for large business have declined in recent years, which could enable YTL REIT to refinance its A$342.8 million (RM984 million) loan at a lower borrowing cost.
“We have pencilled in a 100bps decline in the finance cost for the Aussie loan, which should result in RM9.8 million savings and lift its FY21 earnings.”
In view of the compressed 10-year Malaysian government securities yield and a possible cut in the OPR, the research house anticipates strong investor demand to re-rate the MREITs including YTL REIT.
