StarHill Gbl – Daiwa

Valuation discount persists

Rating maintained

• We maintain our 2 (Outperform) rating and six-month target price of S$0.70, based on parity to our RNG valuation (a finitelife Gordon Growth model. We believe Starhill Global’s discount to the other retail-property S-REITs is unjustified. It is currently trading at sustainable DPU yields of more than 7% based on our FY10-12 forecasts.

Major risk: overcoming its perception problem

• We believe the sponsor, Malaysia’s YTL group (Not rated), has a perception problem. The injection of two Malaysian assets, Starhill Gallery and Lot 10, from the sponsor’s Malaysian REIT at a net-property income yield of 6.8% with a tax-efficient assetbacked securitisation structure, has received, at best, a lukewarm reception from the market so far, in our view. We believe the negative perception does not justify Starhill Global’s valuation discount, although it might take some time for investors to become more comfortable with the sponsor. We believe more clarity on how the assets perform after the acquisition and the leadership of new CEO, Ho Sing, appointed by the sponsor, could go a long way to dispelling the negative perceptions.

Orchard Road supply concern is receding

• We believe the stronger-than-expected absorption of new retail space last year and the modest level of forthcoming supply for the primary shopping area are positive for Starhill Global. As long as Wisma Atria and Ngee Ann City remain relevant (another opportunity for management to prove itself), we expect them to attract their fair share of quality tenants.