StarHill – DBSV

Bright lights, big city

• 2Q13 results in line
  
• Strong reversions for Singapore and Malaysian properties
  
• Expect stronger 2H13; Maintain BUY, TP S$0.94
  

Highlights

Still shining bright in Orchard Road. Starhill Global REIT recorded 2Q13 revenues of S$49m (+6% y-o-y), NPI of S$39m (+5% y-o-y) and distribution income of S$26m (+11% y-o-y).The increase in revenue and NPI were attributable to higher occupancies and reversions for the Singapore properties as well as full-quarter contributions from Plaza Arcade in Australia, which was acquired in 1Q13. The Manager announced 2Q13 DPU of 1.19Scts on an enlarged share base of 2.15bn units (+11%) after YTL Group converted their CPUs into units in early July. The 1H13 DPU of 2.56Scts includes one-off Toshin payout from accumulated rental arrears in 1Q13 of 0.19Scts. 1H13 DPU of 2.56Scts comprises c.53% of our FY13F DPU.

Positive rental reversions across Singapore and Malaysian properties. Starhill announced major rent reviews in Singapore and Malaysia for 2Q13: Toshin renewed its master lease for another 12 years with 6.7% increase in base rent; Starhill Gallery and Lot 10 also saw master tenancy reversions of 7.2%. These reviews were concluded in June, and should contribute to earnings in the coming quarters. Wisma Atria reported rental reversions of c.15% after completion of its AEI works. Around 12% of NLA was reconfigured to house new-to-market brands such as i.t. and Liu.Jo, and going forward, the Manager aims to have 30% of the mall represent tenants that are unique to Wisma.

Our View

Income growth prospects still strong. Going forward, we expect Starhill’s malls in China and Japan to underperform as a result of increasing retail competition in Chengdu and the depreciating Yen. We believe there is good value in the David Jones Building and Plaza Arcade in Australia despite the depreciating AUD, as the two buildings are located next to each other and could benefit from the consolidation of retail space and optimal mix of tenants. Finally, we expect office rents to be stable. Passing rents at Ngee Ann City are c.S$9.50 psf/mth, and some transacted rents have breached the S$10 psf/mth level. With c. 34% and 36% of gross office rentals due to expire at Wisma Atria and Ngee Ann City respectively, there may yet be some upside through positive rental reversions.

Recommendation

Maintain BUY, TP S$0.94. Going forward, we believe that 2H13 will reflect a stronger set of results as reversions from the master leases in Ngee Ann City, Starhill Gallery and Lot 10 begin to contribute on a fullquarter basis. We should also see greater clarity on how the newly fitted out tenants in Wisma Atria are performing. As c.80% of leases in Wisma Atria have a gross turnover (GTO) component, we could see some upside from that aspect in terms of higher tenant sales. We have adjusted our TP slightly to account for a larger share base (from YTL’s CPU conversion) and a higher risk free rate of 2.8% (from 1.8%). Maintain BUY, TP S$0.94.