StarHill Global – DBSV

Great Singapore Sale starts here

• Higher contribution from Wisma Atria in the 2H and upward rental reversion from Malaysia master tenant lease to boost DPU by at least 8%

• No overhang from CPU with minimal dilution of 0.4 -1.2%

• Maintain BUY, TP raised to S$0.75

Strong portfolio performance. Occupancies for Starhill Global REIT’s (SGReit) Singapore office portfolio are back to pre-crisis levels, while Chengdu property’s revenue should improve in 2H with the refreshed tenant mix. More importantly, we see visible growth catalysts coming from: (1) Wisma Atria, as the AEI works complete in 3Q12. About 20% of the mall’s NLA is expected to enjoy close to 50% increase in rents post AEI works. Rental revenue to rise in 2H12 as all the stores that are part of the AEI works including Cortina, Coach and Tory Burch flagship stores have opened. (2) Upward rental reversion of its Malaysia master lease which constitutes 17% of its gross revenue and is due for a 7% rental hike next year. Meanwhile, earnings upside could come from one-off accumulated arrears in rents from Toshin’s lease, if any, which we have yet to factor into our numbers. (3)

Longer term, the possible divestment of its Japanese properties could help to unlock values.

Strong balance sheet with no overhang from CPU. Balance sheet remains strong with gearing at 30% and no major refinancing due this year. In addition, we see limited downside risk from the convertible preferred units (CPU), with dilution estimated at c.0.4% to 1.2% to FY13-14 DPU assuming full conversion.

Compelling valuations with total return of 26%. We see strong organic growth outlook for SGReit’s portfolio, backed by stable income derived from master tenants. SGReit stands out for its compelling valuation of 0.7x P/NAV and attractive FY12/13F yields of 6.7-7.2% in the small mid cap REIT space. We have raised our DCF-backed TP by 5.6%and FY12/13 DPU slightly to account for Wisma Atria’s stronger performance. Our revised TP offers investors a total return of 26%.