Starhill Global REIT (SGREIT SP) - Maybank Kim Eng 2018-01-01: Mixed Bag

Starhill Global REIT (SGREIT SP) - Maybank Kim Eng 2018-01-01: Mixed Bag STARHILL GLOBAL REIT P40U.SI

Starhill Global REIT (SGREIT SP) - Mixed Bag

Initiate coverage with SELL, SGD0.70 TP 

  • Starhill Global REIT (SGREIT)’s 11 retail and office properties in Singapore, Malaysia, Australia, Japan and China offer a play on a recovery in discretionary spending, with its malls mainly located in each market’s premier shopping street. However, its overseas expansion has yet to reach scale and gain traction, with NPI falling the past six years from 40% to 35% in FY17. 
  • We find the shares moderately overvalued and initiate at SELL with a DDM-based SGD0.70 TP (WACC: 7.7%, LTG: 1%). 
  • We see SPH REIT (SPHREIT SP, Rating: HOLD, Target Price SGD1.00) as a better proxy to stronger tourist arrivals and recovery in prime Orchard Road rents.

Orchard Road rent recovery to benefit Paragon 

  • SGREIT commands long WALEs at 4.9 years, which are supported by its master leases (48% of gross rental). We expect an earlier recovery in Orchard Road rents to benefit Paragon (given its size and more upmarket tenant mix). 
  • We are also cautious on the weaker office tenancies in SGREIT’s portfolio. Our model assumes a 5% rise in retail passing rents, and replacement tenants for 50% of the vacated office space.

Limited traction from overseas growth assets 

  • SGREIT has diversified growth overseas with acquisitions in Tokyo, China, and Australia, which in aggregate contributes 32% of its AUM and 36% of FY17 NPI. We view these overseas assets as a marginal distraction to its overall S’pore retail profile, given that their contribution has stayed at 32-34% of its AUM over FY11-17, with two acquisitions in Australia and four divestments initiatives in Japan during the period, even as the NPI contribution has shrunk from 40% in FY11 to 35% in FY17%. 
  • We see better traction from its high-quality domestic operations, given tight Orchard Road retail supply, recovery in prime rents, and gains from possible AEI.

Weak balance sheet, lacking catalysts 

  • SGREIT’s valuations are now at the historical average but the share price lacks catalysts, with a balance sheet that is relatively weaker than its retail peers. 
  • We see SPH REIT as better leveraged to Orchard Road rental recovery.

Value Proposition 

  • As of end-Jun 2017, SGREIT owned 11 mid- to high-end retail properties valued at SGD3.1b in S’pore (at 68% of AUM), Australia (17%), M’sia (11%), Japan (2%), and China (1%).
  • About 48% of its portfolio is derived from long-term master leases, which offer stability and visibility.
  • Orchard Road recovery is expected to support rents at Wisma Atria and Ngee Ann City, given their positioning and connectivity.

Financial Metrics 

  • Revenue growth at 1-2% from rent increase due to master lease at Ngee Ann City. Rents at Wisma Atria to be lifted from earlier recovery in prime Orchard Road rents.
  • Flattish DPU growth over FY18-20E as retail occupancies remain well-supported, but weakness expected for its office properties.

Swing Factors


  • Earlier-than-expected pick-up in leasing demand for retail, office space driving improvement in occupancy.
  • Better-than-anticipated rental reversions.
  • Accretive acquisitions or redevelopment projects.


  • Prolonged slowdown in economic activity could reduce demand for retail and office space, resulting in lower occupancy and rental rates.
  • Termination of long-term leases contributing to weaker portfolio tenant retention rate.
  • Sharper-than-expected rise in interest rates could increase cost of debt and negatively impact earnings, with higher cost of capital lowering valuations.

Chua Su Tye Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2018-01-01
Maybank Kim Eng SGX Stock Analyst Report SELL Downgrade HOLD 0.70 Down 0.890