Starhill Global REIT - Maybank Kim Eng 2018-04-27: Weak Quarter, Weaker Core

STARHILL GLOBAL REIT P40U.SI

Starhill Global REIT - Weak Quarter, Weaker Core

Starhill Global REIT (SGREIT)’s 3Q18 DPU was 8-10% below our and consensus estimates; DPU fell 7.6% y-o-y and 6.8% q-o-q mainly due to lower contributions from its Singapore and Australian properties.
We cut FY18-19E DPUs by 7% to model in slower occupancies and rental assumptions. We find the shares overvalued given a weak Singapore core, despite an underlying sector recovery.
Maintain SELL after 14% cut to our DDM-based Target Price to SGD0.60 (WACC: 8.0%, LTG: 0.5%).

On a relative basis, 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.

Its Singapore revenue/NPI in 3Q18 fell 2.7% y-o-y/2.9% y-o-y, largely due to lower office occupancies and retail contribution at Wisma Atria, which saw a 3% y-o-y decline in tenant sales and 7.2% y-o-y slower shopper traffic, partly due to tenant renovations.
While occupancy for the office portfolio improved from 83.5% at end-Sep 2017 to 90.7% at end-Mar 2018, revenue and NPI fell 10.4% y-o-y and 12.4% y-o-y in 3Q18.

Australia, which contributes 17% of its AUM and 21% of 3Q18 revenue, saw revenue/NPI fall 10.0% y-o-y/13.8% y-o-y. While income disruption from asset redevelopment at Plaza Arcade had been flagged, Myer Centre in Adelaide also saw higher office vacancies. The former, with a new façade and additional 8,000 sf (+30%) space on the upper floor, has been handed over to anchor tenant Uniqlo to commence renovation works, with an opening targeted for 2H 2018.
Malaysia’s revenue/NPI rose 6.4% y-o-y/6.3% y-o-y as the MYR appreciated against SGD. Meanwhile, accessibility to Lot 10 should improve following completion of rejuvenation works to open a new entrance from the new MRT station.

SGREIT’s share price has retreated 8% since our 2 Jan 2018 initiation, underperforming the market and retail REIT peers. We continue to see the shares as overvalued, with a lack of catalysts and a relatively weak balance sheet.
We see SPH REIT as better leveraged to Orchard Road rental recovery.

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/ 2018-04-27

SGX Stock Analyst Report SELL Maintain SELL 0.60 Down 0.700