Starhill Global REIT - RHB Invest 2018-01-30: Transformation In Progress

Starhill Global REIT - RHB Invest 2018-01-30: Transformation In Progress STARHILL GLOBAL REIT P40U.SI

Starhill Global REIT - Transformation In Progress

  • Starhill Global REIT’s 2QFY18 results came slightly below our estimate. The retail and office markets in the Orchard area remain challenging, amidst competitive market conditions, impacting Starhill. 
  • Asset enhancement initiatives (AEIs) are currently in progress across many of its overseas assets, which are expected to contribute positively to total numbers from FY19 onwards. 
  • While Starhill Global REIT's share price has been weighed down by near-term challenges, the stock’s valuation remains attractive. It is trading at a relatively cheap level, ie 0.84x FY18F P/BV, offering a dividend yield of 6.5%. 
  • Maintain NEUTRAL, with an unchanged Target Price of SGD 0.81 (4% upside).

2QFY18 (Jun) DPU falls 7.1% y-o-y. 

  • Starhill Global REIT’s (Starhill) 1HFY18 DPU was slightly below our (47%) and consensus (47%) estimates. This was due to lower contributions from office assets, higher rental rebates (Myer Centre, Adelaide) and higher income retention. 
  • NPI dipped 2.2% y-o-y from lower office income and disruptions stemming from asset enhancement works. 
  • The higher DPU decline was mainly due to the effects of straight-line rental adjustments, and higher withholding taxes in Malaysia and Australia assets.

Singapore’s Orchard retail and office markets remain soft. 

  • The retail occupancy rate at Wisma Atria (WA) declined 1.5ppt q-o-q to 95.9%, while Ngee Ann City (NAC) maintained its full occupancy rate. About 7.5% of the leases expiring at Wisma Atria (as a percentage of gross rental) were renewed during the quarter, with slight negative rental reversions. 
  • Shopper traffic and tenant sales declined 6.2% and 6.3% y-o-y respectively, largely due to the renovation of the food court at Wisma Atria, which was completed in Nov 2017. About 10.4% of retail leases in Wisma Atria are due for renewal in 2HFY18, for which we expect slight negative rent reversions (-1% to -5%) .
  • On the office front, management noted some q-o-q pick-up in demand but rental reversions remain negative due to the high rate of expiring leases. Committed occupancy improved to 89.4% in 2QFY18 (1QFY18: 83.5%), but this was still below the 93.5% recorded in end-FY17. About 9.4% of office leases are up for renewal in 2HFY18, for which we expect negative 5-10% rental reversions.

Asset enhancement updates. 

  • Redevelopment works in Plaza Arcade, Perth are expected to be completed by 1Q18, with a UNIQLO store being the new anchor tenant for the property. 
  • Similarly, for Lot 10 in Kuala Lumpur, external works to create a new entrance from the new MRT station are also expected to be ready by 1Q18. 
  • In China, the mall has been handed over to the anchor tenant, Markor International Home Furnishings Co Ltd, which is anticipated to complete fitting works in the mall by the end of the current quarter.
  • While these works have created a near-term dent in DPU, we expect positive contributions to DPU from FY19 onwards.

Potential for acquisitions/divestments. 

  • Starhill continues to actively look out for acquisitions. However, with the strong cap rate compression across retail/office asset classes in Singapore, yield-accretive acquisition opportunities look limited. 
  • Key near-term target markets for acquisitions are Australia and Japan. The REIT’s net gearing remains modest, at 35.3%, presenting ~SGD250m in debt headroom for acquisitions (assuming 40% as a comfortable level). 
  • Management is also likely to divest its remaining shopping malls in Japan and China at the right opportunity.

NEUTRAL, with an unchanged Target Price of SGD0.81. 

  • We make no changes to our estimates. Our Target Price is based on a DDM methodology (CoE: 7.4%, TG: 1.0%). 
  • Key catalysts for the stock are yield-accretive acquisitions and better-than-expected demand for space in Singapore’s retail and office sectors. 
  • Key risks are a pro-longed weakness in Orchard Road’s retail and office markets and a better-than- expected pick-up in discretionary spend and office demand in the Orchard area.

Vijay Natarajan RHB Invest | http://www.rhbinvest.com.sg/ 2018-01-30
RHB Invest SGX Stock Analyst Report NEUTRAL Maintain NEUTRAL 0.810 Same 0.810