StarHill Global – OCBC

Compelling from both yield & P/NAV perspective

Shoppes cannibalization fears overdone. New retail space at The Shoppes at Marina Bay Sands has begun to open. We believe cannibalization concerns for retail landlords such as Starhill Global REIT may be exaggerated as 1) Orchard Road is likely to remain a key shopping destination in its own right; 2) the product range / price tiers available in, for instance, a Chanel store in The Shoppes and one in Takashimaya are expected to be fairly different. In fact, the increased tourist arrivals led by the re-making of Singapore should more than offset such concerns, in our view. Driven by new attractions such as the Integrated Resorts, visitor numbers have jumped 23% YoY to 6.6m arrivals in the seven months to Jul.

Singapore retail still a key component. We are positive on the retail property sector not only as tourism and increasing consumer confidence drive spending, but also relative to the residential sector, which has significant policy overhang. We note that while Starhill is classified as a diversified REIT, about 66.4% of its asset value stems from Singapore. In addition, we estimate that Singapore retail contributes roughly 51.9% of Starhill’s FY10F gross revenue and 47.6% of FY11F gross revenue (the slight dip reflects the full-year contributions from the recent Malaysia and Australia acquisitions).

Compelling from both yield and NAV perspective. Market chatter on S-REITs has been primarily focused on the high yields relative to benchmarks including the 10-year government bond yield. Starhill certainly delivers on this front with estimated FY10F and FY11F yields of 6.6% and 6.8%. This is just a tad shy of the S-REIT sector average of 6.8% (FY10F) and 7.0% (FY11F). But what makes Starhill particularly compelling to us is that it trades at a significant 35% discount to book value vis-à-vis the meager 4% discount-to-book offered on average by the broader S-REIT sector. We believe this discount is unjustified considering Starhill’s high-quality assets, healthy balance sheet and its strong sponsor.

Valuation. Our DDM-derived fair value estimate of S$0.65 (6.7% discount rate, 0.5% terminal growth rate) is intact; this is equivalent to a fairly reasonable (in our opinion) 0.72x priceto-book. With an estimated total return of 17.7%, we maintain our BUY rating on Starhill. Starhill is also one of our top picks for the S-REIT sector. Key risks to our view include macroeconomic headwinds, foreign exchange risk and changing regulatory and taxation regimes.