Starhill Global REIT: Looking beyond Toshin - Attractive 7% yield for stable portfolio

CIMB Research, September 5, 2011

Analyst: Tan Siew Ling & Janice Ding

Starhill Global REIT
OUTPERFORM
Target Price: S$0.68

Looking beyond Toshin

• Attractive yields for stable portfolio. With increased macro-economic uncertainties, we seek comfort in the stability offered by Starhill's master and long leases and strong balance sheet. Starhill remains the cheapest retail S-REIT under our coverage at 0.7x P/BV and 7.0% DPU yields. Though rental uplift for its Toshin master lease is a key source of growth, we believe all will not be lost even if this fails to come through, as the impact could be mitigated by other sources of growth. We raise our FY11-13 DPU estimates by 1-2% on higher retail-rent assumptions. Our DDM target price accordingly rises to S$0.68 (discount rate 8.8%) from S$0. 66. We see catalysts from positive rental reviews for the Toshin lease, higher-than-expected returns from AEI and accretive debt-funded acquisitions.
• Looking beyond Toshin. Given an under- rented lease, we expect Starhill to be successful in negotiating for rental increases and have factored in a 10% uplift. While failure to achieve any uplift could reduce our FY12 DPU estimate by 3%, we see compensation from other sources of growth.
• Orchard Road retail attractively positioned. With Singapore's growing importance as a gateway city to tap growing affluence in the region, we believe more retailers could be drawn into setting up shop in Singapore. Ranked seventh as a destination for luxury retail brands, we believe Orchard Road is attractively positioned.
• Tough times throw up opportunities. Management remains on the lookout for acquisitions, more so in this environment as asset pricing could be more moderate. With debt headroom of S$450m to a gearing target of 40%, we see DPU accretion of 1-12% for debt-funded acquisitions.