StarHill Gbl – Daiwa

Addition by subtraction

2 rating maintained – still trades at unjustified discount, in our view

• We maintain our 2 (Outperform) rating for Starhill Global because investor concerns about the sponsor and the pending acquisition of retail assets in Malaysia have created one of the rare value opportunities in the S-REIT market for this year, in our opinion. Starhill Global trades at an unjustified (in our opinion) 32% discount to its December 2009 NAV of S$0.82.

Attractive to us even without the proposed acquisitions

• As a measure of prudence, we have disgorged the estimated DPU contribution from the proposed acquisition of the sponsor's retail assets in Malaysia, Starhill Gallery and Lot 10, for RM1,030m, after an absence of concrete news on the deal since its announcement on 18 November 2009. Even after revising down our FY10-12 DPU forecasts by 11.7-14.6%, Starhill Global's DPU yield of 7.1-7.6% is well above those of the SREIT sector and its peers in the retail-property segment. If Starhill Global fails to acquire the assets, for whatever reason, we would not necessarily view it as a bad outcome.

A more rigorous target price of S$0.65

• Our six-month target price of S$0.65 is based on parity to our RNG valuation (a finite-life Gordon Growth model), in which we have discounted the expected income stream from its Singapore properties only at an effective cap rate of 5.89%. We have valued the overseas properties at their December 2009 net asset values, and have assumed that any acquisitions in 2010 would add no value to the overall portfolio.