StarHill Global – CIMB

Limited growth expected

Although SGREIT continues to report a stable performance, we believe the upside to this stock is capped as a result of foreign exchange risks and, more importantly, the lack of clear, meaningful growth catalysts.

The 3Q13 results are in line, with DPU accounting for 24% of our full-year forecast and 9M13 DPU at 75%. In view of a lack of meaningful near-term growth catalysts, we maintain our Neutral rating and DDM-based target price (discount rate 8.1%).

Growth constrained by rising expenses and forex

3Q13 revenue grew by 5.5%, mainly due to i) the increase in base rent (+6.7%) for master tenant Toshin at Ngee Ann City Property, stronger performance of Wisma Atria Property post-AEI and the additional contribution from the newly acquired Plaza Arcade. However, this growth was partly affected by rising operating expenses in Singapore, Australia and Japan. Together with weaker JPY and RM, NPI for the quarter grew slower at 4.4%. During the quarter, portfolio occupancy stood at a firm 99.7%.

Strong balance sheet

The balance sheet continues to remain strong with asset leverage reported at 30.6% (vs. average of 34% in the SREIT space), leaving ample debt headroom for future accretive acquisitions or AEIs. During the quarter, SGREIT completed the drawdown of new unsecured loan facilities to finance its matured debts. With this completed, there will be no refinancing requirement until Jun 2015. Currently, with an average debt maturity of 3.4 years, coupled with 94% of total borrowings hedged as fixed rate, SGREIT’s exposure to rate hikes are relatively well sheltered.

Defensive portfolio with limited growth

Although SGREIT’s portfolio continues to be anchored by stable master leases with expected positive rental reversion from its office portfolio, the lack of meaningful growth catalysts limits upsi