Starhill Global REIT - RHB Invest 2019-08-02: Fair Value Reached; Cut To NEUTRAL


Starhill Global REIT - Fair Value Reached; Cut To NEUTRAL

  • Downgrade to NEUTRAL from Buy, Target Price stays at SGD0.78 for 6% total return as we believe the positives are priced in post STARHILL GLOBAL REIT (SGX:P40U)’s 15% share price rally YTD.
  • Key upside catalysts are a potential sharp turnaround in WA retail rental rates and the redevelopment of underutilised mall GFA.
  • That said, unchanged rental rates for Toshin master leases were slightly below our estimate – and there has been a slight delay in obtaining approvals for its Singapore asset redevelopment.

Wisma Atria (WA) bottoming out; potential upside from redevelopment.

  • The occupancy rate at Wisma Atria’s retail area increased sharply by ~8ppt in 4QFY19 to 99.6%. Tenant sales also grew 8.1% y-o-y, indicating that management’s efforts to reposition the tenant and trade mix are starting to bear fruit. While the mall’s effective rental rate has declined by ~15% over the last two years to ~SGD33 psf, we believe current levels are more sustainable – and expect a slight uptick in rental ahead.
  • Management also emphasised that the focus will be on increasing effective rental rates with occupancy stabilisation. It is also in the advanced stages of finalising plans to tap into an additional ~100,000 sqf of GFA for the mall – which we believe will be DPU- and NAV-accretive.

Toshin master lease rental rate adjustments are below expectations.

  • In June, Starhill Global REIT announced that the Toshin master lease base rental rates will remain unchanged for the next three years post-rent review. This was slightly below our estimate of a low single-digit increase, and underscores the challenging retail climate.
  • Toshin is the master tenant occupying all the retail areas except Level Five of Ngee Ann City (NAC) for a 12-year period (since Jun 2013) with rental rate review provisions every three years. Toshin is also the largest contributor in terms of gross rental, at c.22.9% of FY19F’s total.

Slight delay in Singapore building plan approvals.

  • Starhill Global REIT's new Malaysian master tenancy agreements (see our 21 Mar report titled: Starhill Global REIT - Long Leases Mitigate AEI Impact; Keep BUY) has been approved by unitholders in an EGM.
  • For Starhill Gallery’s (SG) redevelopment, management has the development order but has yet to obtain approvals for building plans and erection of the building. It hopes to obtain the approval by the end of the year, and is currently receiving interim rent amounting to MYR21m. The asset enhancements are expected to be completed in two years.
  • Gearing including capex (SGD58.1m) for asset enhancement initiatives remains healthy, at 36.7%, and we do not see any need for equity fundraising in the near term.

DPU and Target Price adjustments.

  • Our FY19F-21F DPU is lowered by 2% to 4% on the back of lower rental growth assumptions for its Singapore retail assets.
  • We also cut COE by 30bps (in line with sector adjustments).

Vijay Natarajan RHB Securities Research | 2019-08-02
SGX Stock Analyst Report NEUTRAL DOWNGRADE BUY 0.780 SAME 0.780