StarHill Global – DBSV

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• 2Q12 results in line with expectations: 1H DPU forms 51% of our forecast

• Improving office occupancy and Wisma Atria’s AEI to drive earnings

• Maintain BUY at a higher S$0.77 TP

Highlights

2Q12 DPU of 1.08 Scts in line. Gross revenues and net property income came in at c.5.0% higher at S$46.4m and S$37.1m respectively. The stronger performance was largely attributed to Wisma Atria post AEI, which has also locked in a higher ROI of 12.8% vs its initial target of 8%. Assets in Japan and China have also seen better performances due to the strengthening of their local currencies. As a result, distributable income (net CPPU holders) had come in at S$21.0m, which translates to a DPU of 1.08 cts (+3.8%yo-y, +1.0% q-o-q). On a sequential basis, its performance had remained relatively stable, despite a seasonally-weak quarter.

Our View

More to come for Wisma Atria AEI. Going forward, the earnings are still likely to be SG driven. Post AEI, Wisma Atria occupancy has strengthened from 95% to 99.5%, while committed leases in the last 12 months have risen by 33% on a blended basis. That should continue to filter down to 2H earnings. Meanwhile, the outdoor area with the upgraded façade has also created opportunities for hosting promotional events, which in turn would help to drive footfall and revenues. Therefore, footfall and retail sales which are still 9% and 22% lower respectively y-o-y, are expected to improve sequentially.

Strong SG office performance, Chengdu bottoming out. Its office portfolio has also seen a strong uptick from 95% a quarter ago to 98.4%. Committed leases in the last six months were also 19% higher, with signing rents at c.S$9.50 vs FY13 expiring rents of c.S$8.50. While the trust will see close to 40% of the office leases in term of revenues expiring next year, we think its differentiated tenant mix from the CBD and high occupancy should help mitigate leasing risks. Meanwhile, Chengdu property, which has seen a weaker performance due to tenant renovations and competition from newly-opened malls, should bottom out this quarter upon the opening of a major tenant – Zegna in 3Q12.

Proactive capital management. The reit has already started to look at various funding sources for its S$551m loan for refinancing in FY13 and is likely to refinance its S$81m Aussie loan this year. The remaining loan will likely be financed by a mixture of MTN and bank loans, with staggered maturities for diversifying its financing sources and for extending debt maturity.

Recommendation

BUY call maintained, TP raised to S$0.77. FY12/13 yields of 6.2% and 6.5%, backed by a visible organic growth outlook remain attractive. Gearing at 30.5% also means that there is ample room for acquisitions growth. Our revised TP offers a total return of 16%.