Starhill Global REIT - Maybank Kim Eng 2018-07-30: A Firmer Core, Upgrade To HOLD

STARHILL GLOBAL REIT SGX:P40U

Starhill Global REIT - A Firmer Core, Upgrade To Hold

Starhill Global REIT’s Singapore core has been firmed up by a backfilling of office vacancies, and Australia yields should improve following completion of refurbishment at Plaza Arcade in Perth.
Starhill Global REIT’s shares have pulled back to yield 6.9%, now supported by an underlying sector recovery. Fundamentals are supported by its AUM concentration in niche prime locations, master and long-term leases, and proactive AEI profile. Accordingly, we upgrade from SELL to HOLD with 8% higher DDM-based Target Price of SGD0.65 (WACC: 8.0%, LTG: 0.5%).

We prefer Frasers Centrepoint Trust (SGX:J69U, Rating: BUY, Target Price: SGD2.55) for its suburban mall footprint and stronger DPU growth profile.

Its Singapore revenue/NPI in 4Q18 fell 2.6% y-o-y/2.0% y-o-y, largely due to lower office occupancies and retail contribution at Wisma Atria, which saw a 12.7% y-o-y decline in tenant sales and 3.9% y-o-y slower shopper traffic, partly due to tenant renovations.
Singapore’s committed office occupancy jumped q-o-q from 90.7% to 95.0% as at end-Jun 2018, as The Great Room, a hospitality-focused co-working operator, commenced operations at its 15,000 sf space at Ngee Ann City.
Meanwhile, Wisma Atria vacancies were backfilled by Australia-based McCann Health.

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Its Australia revenue/NPI fell 9.9% y-o-y/13.4% y-o-y due to weaker contributions from the office portfolio, retail operations at Myer Centre Adelaide and income disruption from Plaza Arcade’s asset redevelopment in Perth. Redevelopment work was recently completed with the premises handed over to new anchor tenant UNIQLO - its first store in the city is on track to open in 3Q18.
Its Malaysia portfolio, which contributed 13.8% of total revenue, saw NPI rise 4.6% y-o-y due to MYR-SGD appreciation.

Its Singapore AUM (69% of total) was stable, while Starhill Gallery, Myer Centre Adelaide and its China property saw 3.7-6.9% y-o-y downward revaluations, exacerbated by negative AUD movements.
Gearing was also stable at 35.5%; Starhill Global REIT has hedged 96% of its borrowings and refinanced its 2018 maturity to extend average debt maturity from 3.5 to 3.8 years.

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 Research | https://www.maybank-ke.com.sg/ 2018-07-30

SGX Stock Analyst Report HOLD Upgrade SELL 0.65 Up 0.600