Despite reporting a lower distribution per unit (DPU) and earnings for the 2HFY2022/2023 ended June 30, analysts at DBS Group Research and CGS-CIMB Research remain upbeat on Starhill Global REIT (SGREIT).
Both brokerage houses have maintained their “buy” and “add” calls for the REIT, with DBS increasing its target price to 70 cents, and CGS-CIMB keeping its target price at 62 cents. This is on the backing of higher rental reversions, higher occupancy and operating costs being shielded by master and anchor leases.
SGREIT reported a lower DPU of 1.98 cents, a fall in gross revenue by 2.5% y-o-y to $93.0 million, and a decline in net property income (NPI) by 2.0% y-o-y to $73.6 million.
However, Geraldine Wong and Derek Tan from DBS say that these figures are in line with their estimates.
“SGREIT stands out as one of the prime beneficiaries of a return of tourists. Tenant sales surged to a new high in 4Q2022 since the pandemic on strong festive sales and a return of tourists, or about 9% above normalized levels on our estimates. SGREIT will continue to benefit from a return in tourist footfall and spending ahead,” they say.
The analysts note that tenant sales in the quarter to December 2022 surged above pre-pandemic levels for the first time, or about 109% of normalised levels.
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“Wisma Atria is well positioned to capture the return of tourist footfall and spending in Orchard Road, with the Singapore Tourism Board guiding for 30%-60% recovery in Chinese arrivals this year,” say Wong and Tan.
In addition, the mall’s asset enhancement initiative (AEI) was completed in 4Q2022 with about 5% boost in reversionary rents while concurrently refreshing the mall’s tenant mix, they add.
Wong and Tan say that SGREIT’s office segment is also poised to ride on rising rents within the broader Singapore market and will see a boost in reversionary rents and occupancy closing in at 100% for the Orchard offices.
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“These positive data points bode well ahead of chunky renewals up for renewals in FY2023/FY2024 at 43% of gross rental income (GRI) respectively, including SGREIT’s largest master lease tenant Toshin.” they say.
The analysts also note that the REIT’s operating costs have been shielded by its master and anchor leases, which made up approximately half of its leases and contributed about 53% to gross rents for the quarter.
SGREIT will be one of the few REITs within the whole sector with minimal to zero refinancing in its upcoming full financial year, say the analysts, with the earliest tranche of refinancing is due only in September 2024, alongside a 84% fixed hedged ratio which will help shelter most of the impact of interest rate hikes in the coming year.
However, Wong and Tan also note that SGREIT has seen a portfolio devaluation in the range of 3.9% led by its overseas assets.
“Overseas assets saw declines of a larger magnitude at 15.4% for Australia (50 basis points (bps) expansion y-o-y to 6.50%-6.85%) and 7.1% (flat to +20 bps compression y-o-y) for Malaysia.” they say.
With this in mind, the analysts roll forward their valuations into FY2023/FY2024 with estimates largely unchanged, besides updating their foreign exchange translation rate for the Malaysian ringgit to Singapore dollar pairing, alongside a step up of 25 bps in average borrowing cost into the new financial year.
“Our revised DPU forecasts for FY2023FY2024 and FY2024/FY2025 at 3.85 cents/3.82 cents (previously 3.95 cents/3.92 cents) translate to a forward yield of 7.4% as at SGREIT’s last trading price of 52 cents,” they add.
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Likewise, analysts Natalie Ong and Lock Mun Yee from CGS-CIMB note the positive rental reversions in SGREIT’s Singapore and Australia portfolios, and the flat DPU y-o-y growth due to higher income taxes, lower management fees paid in units and higher interest expenses.
They note that on a same-store basis, portfolio valuation fell 3.9% or $111.7 million, mainly due to the Australia portfolio, which saw a decrease of $65 million due to capital rate expansion, softer rents and depreciation of Australian dollar and weaker Malaysian ringgit.
As such, they lower their FY2024-FY2025 DPU by 2.9%-4.2% on lower rents and higher interest cost assumptions.
“Our dividend discount model target price remains at $0.62 after we roll over our valuation to FY2028 and incorporate a higher terminal growth rate of 1.3% (previously 0.5%) on stronger Singapore retail/office rental growth outlook.” say Ong and Lock.
As 12.05pm, shares in Starhill are trading flat at 50 cents.
