Sunday, 21 June 2015

Stock Review – YTLREIT (5109) (YTL HOSPITALITY REIT)

Bursa Malaysia - 5109
Bloomberg - YTLREIT:MK
Yahoo - 5109. kl
Webpage - http://www.ytlhospitalityreit.com/

Key Value Investor Criteria: -

Description
Value
Criteria
Point
Price to Tangible Book Ratio
0.89*
< 1
4/5
Stock Valuation
CAPM => 2.77%
Return (2008-2014) => 5.19%
Undervalue by 2.42%
CAPM < Return
5/5
Return on Asset
2.36*
> 0
4/5
Return on Common Equity
12.84*
> 0
5/5
Quick Ratio
1.58*
>1
4/5
Long term Debt / Total Capital
50.56*
<50%
2/5
Continue Dividend over Past 10 Years / Since Inception
Yes (Since 2006)
yes
2/2
Cash From Operation
Positive > 5 years
Positive
5/5
Total Point


31/37
Note:
 *            Data obtain from Bursa Marketplace on 20/6/2015

By scoring 31/37 (83.7%), we will look into the annual report and the latest quarterly report of YTLREIT before making the decision to buy the stock.

The long term debt / total capital does not meet the criteria (< 50%), however YTLREIT is an investment company that invest in hotel properties. Usually for property investment the gearing can be higher then other business investment such as trading, manufacturing and etc. Hence although high long term debt to total capital ratio, YTLREIT is still a good company to invest in term of long term debt to total capital ratio.

Company Profile

YTLREIT is a real estate investment fund which focuses 100% on hotel properties. It consists of hotels which operated in Malaysia, Australia and Japan. Table below show hotel own by YTLREIT as reported on 2014 annual report:

Property
Location
Age
Lease Term
Malaysia



Ritz Carlton
Kuala Lumpur
20 Years
Until 2026
Residences at the Ritz Carlton
Kuala Lumpur
9 Years
Until 2031
Residences at the Ritz Carlton Phase 2
Kuala Lumpur
9 Years
Until 2031
JW Marriott
Kuala Lumpur
17 Years
Until 2023
Pangkor Laut Resort
Lumut
21 Years
Until 2026
Tanjong Jara Resort
Dungun
19 Years
Until 2067
Cameron Highland Resort
Cameron Highland
40 Years
Until 2026
Vistana Kuala Lumpur
Kuala Lumpur
19 Years
Until 2026
Vistana Penang
Penang
15 Years
Until 2026
Vistana Kuantan
Kuantan
20 years
Until 2026
Australia



Sydney Harbour Marriott
Sydney
25 Years
Self-Operate
Brisbane Marriott
Brisbane
16 Years
Self-Operate
Melbourne Marriott
Melbourne
31 Years
Self-Operate
Japan



Hilton Niseko Village
Hokkaido
20 Years
Until 2026

YTLREIT is mostly owned by YTL Berhad (about 70%) and its subsidiaries. Besides that, four out of eight directors are YTL family member. The board of directors is most probably not going to be independent as most of its are control by the major shareholder, YTL family. Some of the hotel operators of the hotel are also the major shareholder of the company, such as East-West Vesntures Sdn Bhd (hotel operator for Ritz Calton), Sayrikat Pangkor Laut Sdn Bhd (hotel operator for Pangkor Laut resort), Tanjong Jara Beach Hotel Sdn Bhd (hotel operator for Tanjong Jara Resort) and Business & Budget Hotel (Kuantan) Sdn Bhd (hotel operator for Vistana Kuantan). These will cause conflict of interest and the REIT might gives a lower lease fee for them to lease the hotel. However there are some local and foreign funds invested in these REIT. Usually fund managers will analyse the stock before including the stock into the fund’s portfolio. With the fund becoming the largest shareholder it gives a sign that the REIT is undervalue.

PROS
  • YTLREIT operated hotels in Australia by themselves base on Tourism Australia the tourists visiting Australia up to February 2015 has increases compare to last year. These will contribute to the revenue of YTLREIT this year.
  • Some large local and foreign funds invested in YTLREIT. These mean that they are thinking YTLREIT is still undervalued and there are still some profits able to get from the REIT.


CONS
  • Most of the portfolios of YTLREIT are hotel operated in Malaysia. Malaysia tourisms had reduces compared to last year. However all hotel operated in Malaysia are in lease terms which mean it collect rental monthly and does not depend on the occupancy of the hotel.
  • YTLREIT is largely owned by YTL Group and its directors are mostly come from Yeoh family. There might be conflict of interest when coming to decision making.
  • Some of the hotel operators are major shareholder of the company. These might contribute conflict of interest when negotiating the lease term.
  • Most of the Hotel operator either partial owned or wholly owned by YTL group. These might contribute conflict of interest when negotiating the lease term.
  • On average the hotel owned by YTLREIT is 20 years old. There might be some expenses required in the near future to renovate the hotel to make it comparative.

Financial Statement

For the year ended 30 June 2014, there is roughly 29% increase in net property income. These is mainly contribute by the hotel operating income (hotel operate in Australia). As per shown earlier, there is an increase in tourists to Australia in 2015 compared to 2014, therefore I forecast there might be an increase in hotel operating net income. Since the hotel owned by YTLREIT in Australia are old, 16 years, 25 years and 31 years. The hotel operating costs are expected to be increase due to higher maintenance and upkeep of the old property.

As for the property revenue are expected to be decrease due to the car parking income since the tourist coming to Malaysia had reduced significantly in Malaysia for the year 2015 and there are government service tax (GST) implemented on 1st April 2015 where most car park operator absorbing the 6% GST, these will reduce the profit margin of the car park operator. The property expenses for YTLREIT are estimated to be increase as there is GST implemented in Malaysia from April 2015.

By looking at these quarterly report for period end 31/03/2015, despite increase in the tourists into the Australia, the net revenue of the YTREIT is almost the same as 2014 as it might affect by the reduce in property revenue. The property operating expenses is slightly lower compared to March 2014 however the expenses is expected to increase due to GST implement by the Malaysia’s government beginning April 2015. Hence I my view the revenue of YTLREIT will be lower compared to 2014.

YTLREIT had done the revaluation in 2015 as reported on 17 Jun 2015 company announcement. This has increased the unrealised income and the asset by 200,600,000 for the year end 2015. However with the depreciation of the Malaysia Ringgit YTLREIT is expected to be recorded currency translation different more than RM 100,000,000. These might cause the earning per share for YTLREIT is lower than the EPS for 2014.

As of financial report end 30 June 2014, YTLREIT has a term loan of RM 1,518,800,000 which expected to be pay on bullet payment on 23rd November 2017. Using 4.5% annual interest rate for 2 years, the present value of the term loan is RM 1,404,216,000. With YTLREIT current bank and cash equivalent of RM 149,908,000 (about 10%) of the term loan, YTLREIT had obtained approval from Bursa to increase the gross capital by RM 800,000,000 by placement of new unit which I am suspecting they are planning to use that money to repay the loan however they are postponing their issuance of new shares. Based on their latest announcement on 27 May 2015, they managed to extend their placement of new share until 29 December 2015. When the stock placement is implemented, the share will be diluted.

PROS:
  • Australia tourists had increases for the year 2015 compared to 2014. Since YTLREIT is operating three hotels in Australia, the hotel revenue is going to be increase.
  •  Malaysia hotel are lease to hotel operator hence it does not affect much by decreasing tourists visiting Malaysia.
  • The property YTLREIT increase in fair value for 2015.


CONS:
  • Malaysia government implemented GST for beginning April 2015. These will increase the property expenditure cost.
  • Malaysia tourists had been reduced for the year 2015 hence these will affect the property income which include the car park income.
  •  Malaysia currency had depreciated in value for the year 2015, these cause loss in currency translation since YTLREIT has property in Japan and Australia.
  • With the expecting of increase of interest rate as announce by the US FED, the financial cost for the floating rate term loan is expecting to be increase for the year 2015.
  • YTLREIT have term loan of RM 1,518,800,000 which expected to be pay on 23rd November 2017. The current cash in bank and cash equivalent only able to pay 10% of the amount.
  • YTLREIT is suspecting to increase the capital of RM 800,000,000 by placement of new shares to serves the loan. YTLREIT is proposing the placement of new shares. One implemented, the share will be diluted.