Our Arguments: 

  • Brightening outlook heralds new cheer. We upgrade our recommendation to BUY. Starhill Global REIT’s (SGREIT) portfolio operational metrics should improve as the economy re-opens. We see DPUs hitting close to pre-pandemic levels earlier than anticipated, with the return of tourist-led spending as a catalyst for the REIT.
  • Central Orchard malls to enjoy upside when borders re-open. Tenant sales at SGREIT’s Wisma Atria increased to c.84% of pre-COVID levels in 3QFY21, a positive surprise, even when the borders have yet to open. We anticipate strategic upgrades at selected malls in Wisma Atria and Malaysia to drive tenant sales.
  • Possible index inclusion a catalyst in Sept 2021. The recent changes in indexation rules for the EPRA NAREIT Developed Asia Index puts SGREIT in the front seat for possible inclusion in the upcoming Sep 2021 review. 

DCF Valuation. Our discounted cash flow valuation factors in 6% WACC to derive a target price of S$0.75 with no acquisitons assumed. Our target price assumes a 0.56x price-to-bok and a forward 8.0% dividend yield, with a DPU growth of 8% from FY20 and FY21. 

Where we differ:
Focus channeled to actively managed retail leases as SG malls prepare to reopen. 
Retail master leases and office leases make up approximately 46% and 15% of SGREIT’s annual revenue, allowing SGREIT to channel its focus to actively managed retail leases within Wisma Atria and Ngee Ann City. As businesses gradually reopen, SGREIT’s healthy portfolio occupancy of 99.5% (SG retail) with minimal lease expiries of 4.5% in 2Q20 allows the REIT to focus on ramping up operations and resume rental collections. Government cash grants and other sources of support from the enhanced Jobs Support Scheme and bonus payouts for digitalisation will further fortify food and retail businesses to help them cope in these uncertain times.