StarHill Global – DBSV

Let’s focus on the fundamentals!

At a Glance

• Portfolio performance remained healthy, 9M11 DPU makes up 73% of our FY11 estimates

• Improve Supply/Demand outlook for prime retail space to drive prime retail rents

• Slight dilution (c.2%) in DPU in FY11, if Toshin lease renewal takes place in FY12

• Maintain BUY, TP raised to S$0.76

Comment on Results

3Q11 result is in line with expectations. Revenue and NPI fell by a marginal 3% and 4% to S$44.0m and S$34.5 m respectively, due to lower contributions from its Singapore, Japan and Malaysia portfolios. However, lower interest expense and dividend to CPPU holders helped to mitigate the decline resulting in a flattish distributable income of S$19.4m or DPU of 1.0 Scts. 9M11 DPU makes up 73% of our FY11 estimates.

Slide in occupancies expected to be transitional. The occupancy for Wisma Atria office rose 2.6 ppt to 94.6%, while Ngee Ann City office occupancy slipped by 4.8 ppt to 91.8% upon the lease expiry of a mid-sized tenant. However, the group has found a replacement tenant and occupancy should head back to the same level next quarter. Monthly rents signed remained healthy at S$9 -10 psf. Meanwhile, demand for retail space at Wisma Atria remains strong on the back of expansion from existing tenants with reversions as high as 20% from preceding rents.

Better outlook for prime retail space, Toshin renewals could only take place next year. Going forward, the improved supply and demand dynamics along Orchard Rd as well as the upcoming year-end festive season should continue to help lift average retail rents at Wisma Atria and Ngee Ann City. The main concern has centred on Toshin’s lease renewal at Ngee Ann City, which was due in June this year. We estimate that DPU in FY11 will be diluted by a marginal c1.8% if resolution takes place in FY12. In Australia, David Jones’ lease has been revised up by c. 6% upon the review in August and full contribution will be seen in 4Q. After refinancing of its loan upon the expiry of the cross currency swaps, interest rate fell marginally from 3.49% to 3.44% while gearing rose 2ppt to 32%due to the higher exchange rate.

Recommendation

Maintain BUY. SGreit continues to offer attractive FY11/12F yields of 7.1 – 7.4%. Valuation remains attractive at 0.7x P/BV. Maintain BUY, we raised our DCF backed TP to S$0.76 as we rolled forward our numbers to FY12F.