Starhill Global REIT - CGS-CIMB Research 2018-07-30: Weaker Performance

STARHILL GLOBAL REIT SGX:P40U

Starhill Global REIT - Weaker Performance

Starhill Global REIT’s FY18 DPU of 4.55 Scts (-7.5% y-o-y) was below expectations at 90% of our forecast.
Weak retail and office performance in Singapore and Myer Centre in Adelaide were the key drags.
FY19-20F DPU cut by about 8%. Maintain HOLD; Starhill Global REIT’s near-term earnings growth remains sluggish.

Starhill Global REIT posted a 7.6% y-o-y decline in 4QFY6/18 distribution income to S$23.8m (DPU 1.09 Scts). Group revenue declined 3.9% y-o-y to S$51.6m due to weaker office rentals, and lower revenue from Wisma Atria Property (retail), Myer Centre Adelaide and China properties. NPI declined a lesser rate of 3.3% y-o-y due to lower expenses mainly from its China property, Plaza Arcade and Wisma Atria Property (retail).
Overall portfolio occupancy declined 1.3% pt y-o-y in 4Q to 94.2%.
As for FY6/18, distribution income fell 7.5% y-o-y to S$99.2m (DPU: 4.55 Scts), representing a 96.2% payout.

While Wisma Atria's retail occupancy rate remained high in 4QFY18, revenue declined 3.7% y-o-y on lower tenant sales and shopper traffic, partly affected by tenants’ renovations. Meanwhile, the retail performance of Ngee Ann City was largely stable on the back of Toshin as its master lessee.
Overall Singapore office revenue declined 5.3% y-o-y in 4QFY18 on lower average occupancies.

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Starhill Global REIT’s Australian operation (21.7% of 4QFY18 revenue) saw weakness in 4Q revenue (-9.9% y-o-y) mainly due to lower revenue at Myer Centre Adelaide amid higher office vacancies and allowance for rent rebates as well as weaker AUD versus SGD.
Occupancy rate for the asset's retail segment remained high at 95.8% during the quarter. UNIQLO is slated to open its doors at Plaza Arcade by 3Q2018 upon the completion of renovation works; this should help to relieve some pressure on Starhill Global REIT’s overall Australia performance.

Malaysia revenue rose 4.8% y-o-y, mainly due to appreciation of RM against USD. RM appreciated about 5% against SGD y-o-y.
China’s NPI declined 8% y-o-y, impacted by the conversion of its departmental store model to a single tenancy model which entails long-term fixed lease tenancy with a periodic step-up and will provide a stable income to the group.

Starhill Global REIT’s capital management continues to be robust with gearing at 35.5% at end-FY18 and no refinancing needs till FY19F. 96% of its debt costs are hedged with a debt maturity of 3.5 years.
While Starhill Global REIT’s balance sheet remains robust, providing room for acquisitions, its near-term earnings growth remains sluggish as it works to beef up the performances of its offices and Wisma Atria in Singapore, as well as the office segment of Myer Centre Adelaide in Australia.

We cut our FY19-20 DPU estimates by about 8% to factor in the weaker performance from Singapore and Australia. Our target price dips (from S$0.83 to S$0.69) as we roll over our DDM-based valuation to FY19F.
We maintain our HOLD call.
Upside risk could come from higher-than- expected rental reversions and take-up rates of its offices, while downside risk could come from negative rental reversion.

EING Kar Mei CFA CGS-CIMB Research | LOCK Mun Yee CGS-CIMB Research | https://research.itradecimb.com/ 2018-07-30

SGX Stock Analyst Report HOLD Maintain HOLD 0.69 Down 0.830