• Cautious sector view
• Expecting negative FY18 DPU growth
• Lower FV of S$0.65

Underperformance Relative to S-REIT Peers

We retain our cautious stance on the S-REITs sector, and view the relatively more hawkish statement by the FOMC last week as a potential dampener to sentiment ahead. Although the 25 bps rate hike was well anticipated by the market, we note that the committee members have raised their 2018 federal funds rate forecast by 0.3 ppt to 2.4% from their Mar projections.

The FTSE ST REIT Index has delivered negative total returns of 6.1% YTD, while Starhill Global REIT (SGREIT) underperformed its peers, with total returns of -12.2% during the same period.

DPU Likely to Remain Muted in Near-term

We believe SGREIT’s share price underperformance can be largely attributed to its tepid DPU performance and challenging nearterm outlook. As a recap, SGREIT’s 3QFY18 DPU fell 7.6% YoY and this was its seventh consecutive quarter of YoY decline. This was driven by operational weakness from Singapore and Australia, while there were also higher withholding taxes from Australia and Malaysia.

We lower our FY18 and FY19 DPU forecasts by 5.7% and 6.5%, respectively, after taking into account

1. lower rental assumptions,
2. higher effective tax rate and
3. weaker AUD assumption.

Our revised forecasts reflect our expectations of continued softness in SGREIT’s DPU growth outlook in the near-term (4QFY18F: -4.3% YoY; FY18F: -6.7%). Thereafter, we project FY19F DPU to recover 2.1% due to maiden contribution from UNIQLO at its Arcade Plaza and a full-year contribution from Markor International, a furniture manufacturer and retailer, at its China property.

In terms of valuation, we cut our fair value estimate on SGREIT from S$0.77 to S$0.65. This is underpinned by our reduced DPU forecasts and after incorporating a lower terminal growth rate of 1% (previously 1.5%) and higher cost of equity assumption of 8.5% (previously 8.2%) in light of the current market and sector volatilitiebs.

Although SGREIT is trading at FY19F distribution yield of 7.1%, as of the closing price on 18 Jun 2018, this is slightly below its 10-year average forward yield of 7.2%.

Source: OCBC Research - 19 Jun 2018