Starhill Global REIT - RHB Invest 2019-01-17: The Cheapest Retail / Office REIT – BUY


Starhill Global REIT - The Cheapest Retail / Office REIT – BUY

  • Attractive valuation, and one of our sector’s Top Picks with SGD 0.80 Target Price, which is at the high end of consensus, offering 14% upside and a FY19F yield of 6.9%.
  • Starhill Global REIT's current P/B of 0.8x is lower than the average retail REITs of 1.1x P/B (see Figure5 in the PDF report attached) while the yield is 150bps higher than the average listed retail/office S-REITs.
  • With the bottoming out of Orchard-road rents, limited micro-market supply and completion of overseas asset revamp, we believe Starhill Global REIT' is now in a much better position to deliver DPU growth.
  • Our Target Price is DDM-derived (COE: 7.5%, TG: 1.0%, refer to the PDF report attached for DDM valuation details).
  • Key risks are non-renewal of master leases and unexpected slowdown in economy.

SG retail portfolio bottoming out.

  • Based on latest CBRE data (4Q18), Orchard Road rents have inched up by 1.3%YoY since bottoming out in 4Q17. Only 5% of the upcoming 2m sqft of retail supply (see Figure2 in the PDF report attached) is located along Orchard limiting competition. This, combined with positive visitor outlook and Government’s efforts to promote Orchard shopping precinct should benefit STARHILL GLOBAL REIT (SGX:P40U), which derives c.50% income from its Orchard malls.
  • Looking ahead, we estimate the occupancy of Wisma Atria to remain in high 90% with flattish rental reversions. For Ngee Ann City, the Toshin master leases (c.21.6% of gross rent in FY18) are due for review in Jun 2019. The review has a rental downside protection clause with scope for upward revisions based on current market rates.

Upside potential from Asset Enhancement Initiatives (AEIs).

  • Starhill Global REIT is currently considering AEI for both Wisma Atria and Ngee Ann City, with the manager looking at tapping the unutilised GFA of c.100,000 sqft at WA. Such a move is timely as the opening of the Orchard station on Thomson-East Coast line in 2021, will enable more traffic flow from East and Thomson area.
  • With gearing remaining modest at 34.8%, we believe Starhill Global REIT has debt headroom to potentially fund the capex and may not require additional equity fund raising.

Better times ahead for office portfolio.

Overseas portfolio turnaround on completion of AEIs.

  • In Australia, with the completion of Plaza Arcade redevelopment, its anchor tenant Uniqlo commenced operations in Aug 2018.
  • In China, the sole and long-term tenant Markor International began operations in Chengdu Mall in Mar 2018, and should contribute positively in FY19.
  • The master leases for Malaysian properties are due for renewal in Jun 2019 and we understand the tenants are keen on lease extensions, albeit with Starhill Global REIT likely undertaking some additional capex for asset enhancements.
  • Management is also open to divest its Japan and China malls at the right price levels, to recycle capital.

Vijay Natarajan RHB Securities Research | 2019-01-17
SGX Stock Analyst Report BUY MAINTAIN BUY 0.800 SAME 0.800