Maintain BUY and TP of SGD0.68, 17% upside with 7% yield. Starhill Global REIT has demonstrated resilience despite the COVID-19 impact through a combination of stable master leases (c.53% of rent) and active lease management. The return of high-end leisure tourists will benefit its Orchard retail portfolio while long master leases at overseas assets provides income stability. Balance sheet remains in good shape to weather rising interest costs and the impact from rising utility charges is manageable. Starhill is trading at an attractive 0.75x P/BV.

• Orchard malls set to benefit from the return of Indonesian visitors with tourists accounting for 20-30% of the overall tenant sales at Wilma Atria (WA) pre-COVID-19, based on management estimates. Singapore tourism saw a sharp recovery since 2Q with visitors in July recovering to 40% of pre-COVID-19 levels. Indonesia is now the top visitor arrival market for Singapore YTD July (c.17% of total). Past anecdotal evidence shows that high-end tourists from Indonesia prefer to stay and spend more in the Orchard area vs visitors from other countries. This should have a positive effect on tenant sales at its Orchard malls which accounts for nearly half of its income. Already in 4QFY22 (Jun), tenant sales at WA were 4.8% above the pre COVID-19 level though the recovery is uneven across various trade sectors.

• Rents bottoming out. Retail portfolio rent reversion (4Q) though remains negative, management noted that it has been improving from double digit negative rent reversion seen in previous quarters. With tenant sales recovering we expect rent reversions to narrow and be flattish in FY23. Rent rebates, which stood at SGD 4.8m in FY22, should also taper off to below SGD1.0m for FY23. Retail portfolio committed occupancy remains relatively stable at 96.7%. Occupancy at its Singapore office portfolio has been steadily improving and stands at 93.4% (+1.9ppt QoQ).

• High proportion of fixed rates (93%) shields it from rising interest rates with every 100bps increase resulting in a marginal 1% DPU impact. Starhill has SGD125m (12% of total) of medium term notes (MTN) due for refinancing in FY23 at an existing coupon of 3.4% pa and management expects a slight increase (60bps) in interest cost on this. With regards to utility charges, these account for c.4% of overall expenses and assuming doubling of rates, will have a manageable 2% DPU impact. Modest gearing of 36.2% presents SGD150-200m debt headroom for opportunistic acquisitions likely in overseas markets, with management noting its preference to increase its office exposure.
• We raise our FY23-24F DPU by tweaking our rental assumptions. Starhill has an ESG score of 3.0 (out of 4.0) which is in line with the country median score. Thus we apply a 0% premium to our DDM-derived TP.

Source: RHB Research - 9 Sept 2022