Stock Review – YTLREIT (5109) -2 (YTL HOSPITALITY REIT)

Bursa Malaysia - 5109

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

Income Statement

The hotel revenue had drop compared to previous year despite there is a slight increase in the hotel occupancy for the hotel in Autralia. There are two factors that might face by the YTLREIT’s hotel in Autralia which cause the revenue to drop despite the increase of occupancy rate which are:

1. Stronger  Malaysia Ringgit for the period 1 July 2014 – 30 June 2015 compared to 1 July 2013 – 20 June 2014
2. Strong competitive on the hotel price in Malaysia.

Since the hotel revenue is in Australia Dollar with the Australia government just reduce its interest rate May 2015, the Australia Dollar does not expect to appreciate too much these year so do the hotel revenue.

However in August 2015, Malaysia Ringgit had depreciated and become the worst performing Asia currency for year 2015. If these continue YTLREIT might had foreign transaction gain. Malaysia government had set up a team to investigate the Malaysia Ringgit depreciated issue. If success the Malaysia Ringgit might be stable.

The profit before tax and EPS for year 2015 had drop almost 50% compared to year 2014 these is because gain on fair value of investment had decrease from RM 179,440,000.00 to 44,3061,000. These will not affect the income distribution of YTLREIT because gain on fair value is just a paper gain.

PROS

• The drop of profit before tax to almost 50% for the year 2015 will not affect the income distribution of YTLREIT because it is just lesser gain on investment property. The actual cash flow of YTLREIT does not drop 50%.

CONS

• Australia had reduces their interest rate in May 2015 which might causes the Australia Dollar not appreciate too much.
• Malaysia government had set up a panel to look into depreciating Malaysia Ringgit which might bring the Malaysia Ringgit stronger compared to Australia Dollar.

Financial Statement

The deposits in the bank for YTLREIT had reduced roughly RM 20,000,000 compared to last year. From the balance sheet for year ending 30 June 2015, the deposits in the bank is transfer to other receivable & prepayment which RM 15,553,545 is recoverable from Australia tax authorities in the future.

Partial of the loan which supposed to be pay by 23 November 2017 is converted to Australia Dollar loan of a lower interest rate and the due date of the Australia Dollar loan is 29 June 2020.

The remaining term loan of RM821,800,000 which supposed to be paid by 23 November 2017 support my earlier opinion that YTLREIT might use the RM 800,000,000 placement to repay the loan. If my guess is right YTLREIT is going to do the placement before 23 November 2017 which will dilute the shares after that. Besides that, the management might also consider to do the placement before the shares price drop below RM 1.00.

PROS:

• YTLREIT manage to move partial of their loan which is supposed to be paid by 23 November 2017 to a lower interest rate Australia Dollar loan.
•  YTLREIT also manage to extend partial of the loan term to June 2020.
• YTLREIT had revenue from hotel operating in Australia, the loan in Australia Dollar while not affect much by the foreign currency risk because it will cancel each other.

CONS:

• RM 15,553,545 is removed from deposit account which able to earn interest to Australia tax authorities. Although the money is recoverable, but the money is unable to earn interest rate from bank deposit. Consider 2.4 % per annual which is RM 31,107 per month.
• RM 800,000,000.00 placement might be make soon for the loan which deadline is 23 November 2017.
• Shares placement might reduce the share price.

Summary of Stock Reviews

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 1^st 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 23^rd 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 23^rd 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.

Summary of Stock Reviews