Starhill Global – DBSV

Store of opportunities

• 0.7x P/NAV ratio is attractive vs commercial peers

• Multi-prong growth: organic expansion, asset enhancement exercises and acquisitions

• Maintain BUY and S$0.73 TP

More value in store. We are retaining our Buy call for SGReit following updates from management and the HK NDR. SGReit’s unique value proposition lies in its prime retail offering and niche office exposure along the Orchard Rd belt. FY11-12F yields of 6.9%-7.3% imply attractive 280bps spread over the risk free rate, backed by the top class commercial assets in town and a reputable sponsor. There is good earnings visibility going forward, led by organic growth potential and proactive asset enhancements. At current valuations of 0.7x P/book NAV vs its commercial peers’ 0.8–1.3x, valuations are attractive. At S$0.73 target price, the stock offers 23% total return.

Stronger organic growth. Earnings growth will be driven by (i) positive rental renewals from two master tenants, Toshin and David Jones, which contribute a quarter of its portfolio revenue. Toshin’s lease reversions are capped at 25% above preceding levels, but we conservatively imputed only 10% despite 20% adjustment in the last cycle. For David Jones, we expect 6%-8% rental hike; (ii) robust outlook for Singapore’s commercial industries along with stronger tourist arrivals, which should have a knock on effect on portfolio performance; and (iii) proactive asset management exercises e.g. reviewing tenancy mix at Wisma Atria, to enhance shoppers’ experience and footfall.

Optimising yields, growing portfolio. SGReit will spend c.S$41m to create more prime space at Wisma Atria and Starhill Gallery, and is targeting 7-8% IRR within the next few quarters. Despite the small impact, we are encouraged by its efforts to create more value for unitholders. Gearing remains low at 30% with no refinancing requirements this year, placing it in good position to make acquisitions.