• DPU expected to see growth again
• FY19F yield of 7.0% as at 16 Aug close
• Higher FV of S$0.74

Worst Likely Over

We reassess our analysis and assumptions on Starhill Global REIT (SGREIT) following its 4QFY18 results. During our last report titled: “Time is not ripe yet” on 19 Jun, we highlighted our expectations that SGREIT would end its FY18 financial year on a soft note.

Indeed, SGREIT recently reported that its 4QFY18 DPU fell 7.6% YoY to 1.09 S cents and this culminated in a fullyear DPU decline of 7.5% to 4.55 S cents. Part of this weakness can be attributed to its Singapore office segment, which saw NPI dipping 13.7% to S$17.4m in FY18. This in turn was contributed by softer occupancy rates and negative rental reversions.

Looking ahead, we believe the worst is likely over for SGREIT. Its committed Singapore office occupancy has moved from a low of 83.5% in 1QFY18 to 95.0%, as at 30 Jun 2018. This was buoyed by the addition of The Great Room, a co-working operator, which commenced its operations in Jun at Ngee Ann City by taking up 15k sq ft of space.

The recovery in Singapore office market rentals has also boosted recent signing rents for SGREIT’s office portfolio. For retail, challenges will likely remain, but this will be partially buffered by the long-term master lease with Toshin at Ngee Ann City Retail, with the next rent review in Jun 2019.

Meanwhile, in Australia, its Plaza Arcade mall will see new anchor tenant UNIQLO opening its doors in 3QCY18. We fine-tune our assumptions and raise our FY19 and FY20 DPU forecasts by 1.0% and 0.3%, respectively.

Our revised projections translate into DPU growth of 4.0% for FY19. Rolling forward our valuations and incorporating a higher terminal growth rate of 1.5% (previously: 1.0%) and lower discount rate of 8.2%, we lift our fair value from S$0.65 to S$0.74.

Time to Revisit This Stock

SGREIT’s share price has fallen 12.9% YTD, making it one of the worst performing S-REITs. With expectations of DPU recovering in FY19 and valuations still not reflective on this, given that SGREIT is trading at FY19 distribution yield of 7.0% and P/B of 0.74x (as at 16 Aug closing price of S$0.675), we believe it is an opportune time for investors to revisit this stock.

Furthermore, given macroeconomic uncertainties amid Turkey’s woes and trade war tensions, we believe investor sentiment has been negatively impacted and hence the market may be more inclined to look for more defensive sectors such as S-REITs.

Source: OCBC Research - 17 Aug 2018