KUALA LUMPUR: YTL Hospitality REIT
is a still a Buy though Affin Hwang Capital Research has lowered its target price from RM1.60 to RM1.38 due to the dilution effect after its equity placement.
It said on Friday the Buy rating was based on the attractive yields of 7.0% to 7.6%. Future asset injections remain a catalyst for the REIT.
The research house explained the lower target price was subsequent to the RM402mil equity private placement raised, which was completed on Dec 16, 2016 (comprising 380 million new YTL REIT shares).
Proceeds from the placement will be used to de-gear existing Malaysian bank borrowings (based on a cost-of-debt of 4.9%) and the higher distributable income as a result of the interest-savings will be distributed back to shareholders.
“Due to the higher cost-of-capital from the proceeds, as it is based on a cost-of-equity of 8.08% vis-à-vis a cost-of-debt of 4.9% (with the bank borrowings), the distributable income (per unit) to the common equity shareholders of YTL REIT has been diluted by 7.7% for FY17E and 9.0-9.4% for FY18-19E.
“This is despite an increase of 16-17% in absolute distributable income. In our FY17E forecasts, we have also factored-in administrative cost of RM4mil due to placement fees,” it said.
Affin Hwang Capital Research said YTL Hospitality REIT’s FY17-19E dividend per unit (DPU) yields remain attractive at 7.0-7.6% while trading at price-to-net asset value of 0.73 times.
“With a lower gearing of 0.33 times anticipated (with the repayment of bank borrowings) vs. 0.44 times previously, YTL REIT could gear up by approximately RM617mil (based on a 60% limit which was approved by shareholders) for future acquisitions.
“Compared to peers, YTL REIT’s management could at any time inject mature properties under the stable of YTL Hotels (the hospitality arm of YTL Corp) into YTLREIT. Meanwhile, management is also constantly on the lookout for strategic acquisitions in more robust cities such as London.
“Key risks to our call: i) non-renewal of lease agreements; ii) a sharp slowdown in economic growth, especially in Australia’s key cities; iii) higher debt-refinancing rates; and iv) a steepening of the 10-year MGS yield curve would continue to dampen REIT valuations,” it said.
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