Starhill Global – DBSV

Further savings from MTN issue

• Refinancing RM330m senior bonds results in interest savings of S$0.7m p.a.
  
• Diversified income stream and large proportion of master leased income offers resilience amid uncertainty in Singapore’s retail outlook
  
• Upgrade to BUY, TP raised to S$0.90
  

Prudent capital management amid interest rate uncertainty. SGREIT announced that it has refinanced its outstanding MYR debt that was previously used to fund the acquisitions of Lot 10 and Starhill Gallery. A five year senior MTN was issued at a lower effective interest rate of 4.75% p.a. (vs. 5.35% previously), thereby extending the REIT’s debt expiry profile to 3.8 years from 3.2 years. We estimate that this will generate interest savings of c.S$0.7m p.a., or 0.4Scts per unit. As it stands, 100% of SGREIT’s total borrowings have been hedged into fixed rate debt, thereby providing investors with visibility and certainty about interest expense during a period of interest rate uncertainty.

Income resilience despite headwinds in Singapore’s retail sector. In our earlier report titled “Diving deep into the nuances of the retail sector” (17 Sep 14), we highlighted SGREIT as having one of the most resilient income streams among the Singapore-based retail and commercial SREITs, due to its geographic and asset class diversification, as well as sizeable base of income derived from master leases. We estimate that only c.30% of the REIT’s total revenue is directly exposed to Singapore’s retail sector, through Wisma Atria and level 5 of Ngee Ann City. As both assets are located in the prime Orchard Road area, we believe that they will be beneficiaries of the improvement in visitor arrivals in 2H14 and hence remain resilient.

Upgrade to BUY, TP raised to S$0.90. We like SGREIT for its resilience amid concerns about interest rate volatility and retail sector headwinds. At current prices, the stock offers dividend yields of 6.3-6.5% for FY14/15F, which is attractive, in our view. We upgrade the stock to BUY, with a higher TP of S$0.90.