StarHill Global – Kim Eng

Luxe at a bargain

Event

• Rental rates of prime retail space along Orchard Road have remained firm and look set to climb amid a rosy economic outlook and in the absence of new supply over the next two years. Starhill, which derives two‐thirds of its revenue from Ngee Ann City and Wisma Atria in Orchard Road, is poised to enjoy positive rental reversions. We reiterate our BUY recommendation and target price of $0.80.

Our View

• Approximately 20% of Starhill’s retail leases in Singapore will expire this year. We estimate that the current passing rent of its expiring leases is about 30% below the prime retail space rent in Orchard as of 4Q10. With prime retail rents heading north and no new supply in sight, we have factored in positive rental reversions over the next two years.

• Suburban retail rents, on the other hand, may come under pressure as 1.3m sq ft of new retail supply come to the market in the next two years. This includes Clementi Mall (193,750 sq ft), JCube (204,000 sq ft) and Changi City Point (207,000 sq ft). That prime retail rents may increase and suburban retail rents may get squeezed indicates that the gap between the two could start to widen from the current narrow band.

Starhill, with its value proposition as an undervalued prime retail REIT, should benefit.

• With suburban retail REITs like Frasers Centrepoint Trust and CapitaMall Trust trading at a premium of 20‐30% to their book value, Starhill appears to be a good bargain at just 0.7x P/NAV.

Action & Recommendation

We reiterate our BUY rating and target price of $0.80, based on an attractive forward DPU yield of 6.7%. Starhill will continue to enjoy stable rental income from its overseas assets thanks to the long‐term leases. Acquisitions and asset enhancements could be the major catalysts for re‐rating.