StarHill Global – Kim Eng

New beginning beckons

We initiate coverage on Starhill Global REIT with a BUY recommendation and target price of $0.80/share. Starhill owns 13 prime commercial properties in stable, high‐growth markets in the Asia Pacific, with retail rental making up 87% of group revenue in 3Q10. DPU growth is bolstered by medium‐ and long‐term leases that provide income stability and rental upside potential, as well as acquisition opportunities. With a clear target to double asset size and the backing of a strong and committed sponsor, Starhill is poised for a new beginning. At 0.7x FY10 P/B and 6.8% FY11F yield, the stock is deeply undervalued.

Steady income from defensive rental structure

Starhill has a stable of master and long‐term leases that comes with built‐in positive rental reviews every few years. This ensures a steady stream of longterm income for the group. Around 44% of its total revenue this year comes from such leases. Its medium‐term leases, which are typically for three years, have rental tied to gross turnover, thus allowing Starhill to ride on market rental recovery and rising consumption in retail markets such as Singapore.

Asset size to double in five years

Unlike many other REITs, Starhill’s REIT manager has a clear target to double Starhill’s portfolio from $2.6b currently to at least $5b in five years. The REIT manager has been sourcing for third‐party assets in China, Australia, Singapore and London, and has a few deals on the negotiating table.

Committed sponsor with deep pocket

Starhill’s sponsor is YTL Corporation Berhad, one of the largest companies listed on Bursa Malaysia. YTL aspires to own a portfolio of prime commercial properties globally under the luxury Starhill brand, and the REIT is a viable vehicle to achieve its dream. Its financial prowess and commitment should provide Starhill with the necessary support for acquisitions.

Sharp discount hard to ignore; initiate with BUY

Starhill is trading at a steep 30% discount to its NAV in stark contrast to the 10‐30% premium commanded by its peers. We think this could be because of the lack of asset enhancement initiatives on its part. Its FY11F DPU yield of 6.8% offers a yield spread as high as 160bps over the yield of some of its retail peers. We initiate coverage with a BUY recommendation and target price of $0.80/share, based on the Dividend Discount Model.