SINGAPORE (June 3): RHB Securities analyst Vijay Natarajan has upgraded Starhill Global REIT to “buy” from “neutral” with a lower target price of 63 cents.
This is down 13 cents from its previous 76 cent call, and believed to give the stock a 17% upside from its 54 cent closing on Tuesday, Natarajan says in a June 3 note.
The REIT is currently trading at a price-to-book ratio of 0.6, compared to a peer average of 1 and a sector average of 1.1. This makes it a “laggard among retail REIT peers in terms of valuation,” he says.
“We believe the reason for [the] valuation gap is due to market concerns on its exposure to high-end retail, Wisma Atria’s shorter remaining land tenure (41 years), and declining average retail rents. At current levels, we believe the negatives have been fully priced in”.
With a gearing of 36.7% - well below the revised 50% threshold – Natarajan says there is still room for a rebound.
His view is despite the austere outlook for REITs, and comes from the REIT’s stability from the contributions of its anchor leases. These tenants account for nearly half of its rental income.
Starhill Global REIT’s portfolio comprises 10 properties in Singapore, Malaysia, China, Japan and Australia. Its Singapore properties include the prominent Wisma Atria and Ngee Ann City located at the Orchard Road retail belt.
In its recent 3QFY19/20 earnings ended March, the REIT recorded $35.2 million in net property income, down 11.1% from its $39.6 million in the previous year. This comes from the $13.7 million in rental rebates disbursed to eligible tenants.
Starhill Global has since announced on May 18 that it has set aside $18.1 million for approximately two months of rental rebates and property tax rebates in Singapore.
With government regulations requiring landlords to extend more support to small and medium enterprises and retail tenants whose businesses remain shut in phase one, Natarajan is looking at an additional $5 – 10 million disbursement.
Across the causeway, its Malaysian assets under master leases have been offered some $0.4 million in rent rebates.
The REIT is in the midst of finalizing its rent relief packages for Down Under. Based on calculations, Natarajan predicts a AUD$6 million (S$5.81 million) disbursement, which translates to a 1.5 month rebate for each tenant.
However, these are said to be mitigated by the REIT’s two master leases – the Toshin master lease in Singapore (expiring in 2025) as well as long-term master leases for its Malaysia portfolio which accounted for 33% of its 3QFY20 revenue.
Observing that the lessees are still in good financial shape, Natarajan does not foresee any defaults or delays in the payments for these leases.
Going forward he flags the possibility of a 5% decline in retail occupancy over the next two years, from its current 96.3% rate. This is due to the pressures of the pandemic, he adds.
He is thus lowering his FY20F-22F distribution per unit (DPU) forecast by 8-19%.
As at 11.38am, shares of Starhill Global REIT were up 1.5 cents or 2.804% to 55 cents.
