StarHill Gbl – DBS

Earnings growth from David Jones

At a Glance

• DPU of 0.97 Scts for 4Q09
• Retail income to support weakening office revenue
• Maintain Buy, TP $0.66

Comment on Results

DPU of 0.97 Scts. Gross revenues and net property income grew by1.5% and 3.2% to S$34.3m and S$26.8m respectively. Growth was largely contributed from stronger retail revenues from its Singapore and China properties, offset by weaker performance at its office space. Distributable income came in at $19.1m, which is a 5.5% yoy increase, translating to a DPU of 0.97 Scts. The group also wrote their book up slightly by S$25m or 1.4% – NAV per unit stands at S$0.82.

Retail portfolio to offset weakening office space. SGReit’s office portfolio is expected to face downward pressure on rents from 2010 as negative rental reversions starts to kick in. The group expects to renew a total of total of 47.2% of its office NLA over 2010-11. Current rents are ranging between $7-9psf/mth compared to the expiring levels of c$10psf. The drag is likely to be offset by income from its retail portfolio and new contributions from the David Jones property in Australia. Retail rents are expected to be underpinned by the pick up in retail sales on the back of an improving economy, anticipated increase in tourist arrivals and absence of new supply (in view of the strong absorption of the new stock). Income from the acquisition of the David Jones asset should be felt from 1Q10 with the recent completion of transaction.

Recommendation

We maintain our Buy call with TP at $0.66. SGReit remains one of the major beneficiaries of the improved tourism outlook with the upcoming opening of the 2 IRs and is well-located malls in the heart of the Orchard Rd shopping belt. The stock is offering FY10- 11 DPU yield of 7.2-7.4% and 0.64x P/bk NAV.