No meaningful catalysts in the stars
Although the performance of SGREIT’s portfolio continues to be stable, we believe the upside to this stock is capped as a result of foreign exchange risks and, more importantly, the lack of clear, meaningful growth catalysts.
The successful negotiation with Toshin has boosted earnings for Starhill Global REIT (SGREIT) in FY13. However, the lack of potential growth catalysts limits further growth in this stock. Under our new rating structure, our Neutral call changes to a Hold. Our DDM-based target price (discount rate: 8.1%) is unchanged.
The two-tranche increase in base rent (+10% in 1Q13 and +6.7% in Jun 2013) for master tenant Toshin at Ngee Ann City Property, the stronger performance at Wisma Atria post-AEI and the additional contribution from the newly acquired Plaza Arcade have boosted SGREIT‟s FY13 earnings. However, this growth was partly affected by i) rising operating expenses in Singapore, Australia and Japan; ii) weaker yen and RM and iii) weaker performance in China‟s Chengdu as the retail mall landscape remains competitive. As of 3Q13, portfolio occupancy stood at a firm 99.7%.
Limited acquisition opportunities
SGREIT‟s balance sheet continues to be strong, with asset leverage reported at 30.6% (vs. average of 34% in the SREIT space), leaving ample debt headroom for future accretive acquisitions or AEIs. However, acquisition in the luxury retail market could be difficult given a lack of acquisition targets and high capital values. Also, with competition and supply rising in Chengdu, exiting China could be a mid- to long-term strategy for the REIT. Currently, with an average debt maturity of 3.4 years and 94% of its total borrowings hedged as fixed rate, SGREIT‟s exposure to rate hikes is relatively well sheltered.
Few meaningful catalysts
Although SGREIT‟s portfolio continues to be anchored by stable master leases with expected positive rental reversion from its office portfolio, the lack of meaningful growth catalysts limits upside for this stock. We rate it a Hold.
Publish date: 29/11/13