Singapore Retail REITS – Daiwa

The laggard stands out

Summary

• The recovery in retail sales has just started to gain pace, while the rental decline from 2Q08 might soon be over, but we believe expectations of a gradual retail-sector recovery have already been discounted fully.

• We have not changed our preference for using the Daiwa RNG valuation method (a finite-life Gordon Growth model) as our primary tool for valuing Singapore real-estate investment trusts (S-REITs), but we have modified this valuation approach slightly to improve the comparability of its results.

• In contrast to its peers, which we see as fully-valued, we believe Starhill Global is a standout on valuations and distribution-per-unit (DPU) yield, even if we ignore the proposed acquisitions in Malaysia. We maintain our 2 (Outperform) rating for Starhill Global, with an RNG valuation-derived six-month target price of S$0.65.

• We have downgraded our rating for Frasers Centrepoint Trust (FCT) to 3 (Hold) from 2 (Outperform), after lowering our RNG valuation-derived six-month target price to S$1.44 (from S$1.54).

• We maintain our 3 (Hold) rating for CapitaMall Trust (CapitaMall), which looks fully-valued (in our opinion) for a dominant market leader that faces low single-digit-percentage DPU growth (based on our revised DPU forecasts) for FY10 and FY11.