HOLD (from Buy)
Share price: SGD0.77
Target price: SGD0.84 (from SGD 0.95)
Yearning For Growth
Fairly valued, cut to HOLD. We downgrade Starhill Global REIT (SGREIT) to HOLD on valuation grounds and lacklustre DPU growth prospects. The rejuvenation of Wisma Atria is coming to an end and it has already completed its Toshin master lease renewal at Ngee Ann City. Its Malaysia portfolio has also realised 7.2% rental reversion from the master tenant following the extension of the lease by another three years. We forecast an unexciting 0.6% DPU CAGR in 2013-2015. At 6.5% FY14F yield and 400bps yield spread, our DDM-based TP works out to SGD0.84 (previously SGD0.95).
China portfolio a drag. Despite 100% occupancy, Renhe Spring Zongbei's 3Q13 revenue contracted 20% QoQ and 14% YoY. On a trailing 12-month basis, revenue fell 10% YoY, as the high-end and luxury retail segments continued to contract amid a slowdown in China’s growth, weaker consumer sentiments and the country’s ongoing austerity drive. The coming supply of retail space has also placed pressure on the Chengdu’s retail landscape. We see no upside potential for Renhe Spring Zongbei in FY14 and believe that a divestment may be the best option for the mall at this juncture. The China mall contributed ~6% and ~4% of 3Q13 revenue and NPI, respectively.
Sound balance sheet. Following the CPU conversion into 210.2m units by the YTL Group on 5 Jul 2013, its stake in SGREIT increased to 36% from 29%. Nevertheless, we still expect YTL to convert the remaining 20.3m CPUs into 28m units by end of this year. Aggregate leverage inched up to 30.6% from 30.3% last quarter. Net financing costs for 3Q13 averaged 3.02% (2Q: 3.03%, 1Q: 3.08%) with an average term of debt of 3.4 years (2Q: 1.2 years, 1Q: 1.4 years).
Yearning for growth but nothing to show. SGREIT’s future growth drivers include the potential asset redevelopment of David Jones Building and Plaza Arcade in heart of Perth CBD. Its Australia portfolio made up ~10% of gross revenue in FY13. Management is looking at conducting a feasibility study on possible renovation works in 2014. In addition, an upward-only lease review for David Jones Building is due in Aug 2014, which SGREIT is guiding for a possible 6% positive rental reversion. Nonetheless, we think that inorganic acquisitions stand a higher chance of “moving the needle”, and management has said that it is targeting markets in Singapore, Malaysia and Australia. Until we see results, we downgrade our stock recommendation to HOLD with a TP of SGD0.84.
Publish date: 06/12/13