StarHill Global – CIMB

Attractive yields for well-heeled retail malls

• Attractive yields for well-heeled retail malls; initiate with Outperform. Starhill’s portfolio is dominated by high-end retail properties located in prime shopping districts in Singapore, Malaysia, China, Australia and Japan. We use DDM (discount rate 8.4%) to value Starhill and arrive at a target price of S$0.74. We believe its well located assets, master leases and low asset leverage offer income stability. FY11 DPU yield of 6.7% is also the highest among retail REITs under our coverage. We see catalysts from higher rental revisions, asset-enhancement initiatives and accretive acquisitions.

• Master leases for income stability. While exposure to discretionary spending (in high-end retail malls) typically increases volatility, we expect master and long leases, which anchor about 44% of our FY11 revenue forecast, to mitigate these volatilities. Master and long leases on its overseas assets, likewise provide income stability as the REIT ventures overseas for growth.

• Growth catalysts. Its Toshin and David Jones master leases will be up for reviews in FY11. With both properties substantially under-rented, we see room for upward rental revisions. Management has also announced asset-enhancement plans for Wisma Atria, which should drive rental growth on completion. Meanwhile, low asset leverage at 30% leaves room for acquisitions without the need for substantial equity fund-raising.