StarHill Global – OCBC

Positive on Wisma’s facelift but Japan Earthquake created a dent

Facelift for Wisma Atria. Starhill Global REIT announced its plan to embark on asset redevelopment of Wisma Atria to boost the mall’s positioning along Singapore’s Orchard Road. The first phase of the redevelopment will commence in 1Q11 and is expected to complete by 3Q12. The asset redevelopment will unveil an ultra sleek frontage for Wisma Atria, highlighted by double-storey storefronts designed to showcase the latest flagship stores of international retailers. There will be full width steps spanning the facade of Wisma Atria, which will improve accessibility and also provide a permanent flood control measure, doing away with mechanical flood barriers. In addition, there are strategically located ramps and walkways leading to the new shop fronts from the surrounding malls and the nearby Orchard Road MRT station. Phase one of Wisma Atria’s asset redevelopment is expected to incur capex of about S$31m and generate an additional net property income of approximately S$2.5m per annum when stabilized, representing a ROI of approximately 8.0%. The cost of the asset redevelopment works will be funded from the proceeds of the rights issue completed in 2009 and/or working capital. We view this positively, in terms of both higher occupancy and rental rates following the enhancements in 2012.

Impact of Japan earthquake. Starhill has seven malls located in central Tokyo, which contributed 4.6% of total gross revenue and 6.6% of portfolio value as at 31 Dec 2010. So far, Starhill has announced that there is no known damage to the malls based on preliminary reports by its property managers. Nonetheless, we expect retail sales in Japan to be impacted, on the back of electricity rationing in Tokyo which will affect business operations in the near term, as well as an anticipated dent in tourist shoppers in the medium term following Japan’s nuclear fiasco and the risk of radioactivity exposure. We thus revise our FY11/FY12 gross revenue estimates for Japan properties down by 5% to adjust for declining sales and rental income. Our sensitivity analysis also shows that a 5% drop in the rental income of Starhill’s Japan assets will decrease its fair value by 0.4 S-cents.

Valuation still compelling. We noted that Starhill’s assets in Singapore, Malaysia, Australia and China still constituted the majority portion (93.4%) of its portfolio. Starhill is currently trading at a PBR of 0.66x, which is lower than its historical PBR of 0.73x since listing. Notwithstanding that the Japan crisis has bitten into Starhill’s earnings, we still believe in its prime assets positioning, strong sponsor and sound financials. Maintain BUY with a decreased fair value of S$0.69 (Price upside 12.2%)