Starhill Global REIT - RHB Invest 2018-12-14: A Turnaround Play


Starhill Global REIT - A Turnaround Play

  • Maintain BUY, SGD0.80 Target Price offers 19% upside and 7.5% FY19F yield.
  • Starhill Global REIT has been going through challenging times, hit by tough retail markets in Singapore and overseas. However, we believe a turnaround is on the cards with the stabilisation of Orchard Road retail malls, a pick-up in Singapore office rentals and asset enhancement exercises coming to an end - all acting as catalysts. 
  • Nearly half of its rental comes from master leases, which provides income stability.

SG retail portfolio bottoming out.

  • While the outlook for retail space on Orchard Road remains challenging, we believe the limited supply should cap any further downside.
  • While rental pressures are likely to persist for Wisma Atria’s retail space outlook, the occupancy rate is likely to stay, ie in the high 90%.
  • For Ngee Ann City, Toshin master leases that expire in 2025 (21.6% of gross rent in FY18) are due for lease reviews in Jun 2019. The review has a clause that insulates it from any downside (ie rental rates cannot be adjusted lower than current levels), with scope for upward revisions based on current market rates.

Asset enhancement initiatives (AEIs) could provide a necessary boost.

  • Starhill Global REIT is currently considering asset enhancement opportunities for both Wisma Atria and Ngee Ann City. This will also lead to the REIT manager looking at tapping the unutilised GFA of c.100,000 sqf at Wisma Atria.
  • We believe such a move is timely, as the opening of the Orchard MRT station on the Thomson-East Coast line in 2021 will enable more traffic flow from the East and Thomson areas.

Expect a better performance from office assets.

  • Starhill Global REIT’s SG office portfolio - which has been hit mainly by oil & gas tenants downsizing - is starting to show a good improvement, with committed occupancy rates on the rise.
  • With an improving outlook for office rental rates island-wide, we expect a better performance from the office portfolio in FY19-20.

Overseas portfolio turnaround on completion of AEIs.

  • In Australia, with the completion of Plaza Arcade redevelopment, anchor tenant Uniqlo commenced operations in end-August.
  • In China, the sole and long-term tenant Markor International began operations in Chengdu Mall in March, and should contribute positively to numbers next year.
  • The master leases for Malaysian properties are due for renewal in Jun 2019, and we understand the tenants are keen on extending their leases, with negotiations now in place.

BUY, with a Target Price of SGD0.80.

  • Our Target Price is based on DDM (COE: 7.5%, TG: 1.0%).
  • Key catalysts are a pick-up in the Singapore office portfolio and a better performance from overseas assets post revamp.
  • Valuations look attractive, and the stock is trading at 0.7x 2019F P/BV and offering yields of > 7%.
  • Key risks are a prolonged weakness in the Orchard Road retail and office markets.

Vijay Natarajan RHB Securities Research | 2018-12-14
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