• Starhill Global REIT's 1QFY20 DPU of 1.13 Scts (-1.7% y-o-y) was in line with our expectation.
• Singapore retail revenue showing signs of stabilising.
• Maintain HOLD due to muted growth in the near term.

In-line 1QFY20 Results

• STARHILL GLOBAL REIT (SGX:P40U) posted 1QFY20 DPU of 1.13 Scts (-1.7% y-o-y; +2.7% q-o-q), in line at 25.4% of our full-year forecast. See Starhill Global REIT Announcements.
• 1QFY20 revenue declined 7.8% y-o-y to S$48m while NPI dropped 8.7% y-o-y to S$37m, were mainly due to partial income disruption from the planned asset enhancement works (AEW) at Starhill Gallery in Malaysia.
• DPU had declined by a smaller quantum as the income disruption at Starhill Gallery was mitigated by the manager receiving part of its base management fees in units. See Starhill Global REIT Dividend History. Excluding the asset enhancement works effect at Starhill Gallery, revenue and NPI decreased 2.4% and 1.7% y-o-y respectively, partly due to the weaker A$ against S$.

Retail Stabilising; Office Weakened

• The revenue and net property income (NPI) from Wisma Atria's (WA) retail portion finally stabilised in 1QFY20, with revenue flat and NPI up 3.3% y-o-y. However,declines were seen in the revenuesfrom the office portion of Wisma Atria (-3.7% y-o-y to S$2.4m) and Ngee Ann City (-2% y-o-y to S$3.7m), mainly due to lower average occupancy. Revenue from Ngee Ann City retail dipped 1% y-o-y to S$12.5m due to softer rent.
• Wisma Atria’s tenant sales grew for the third consecutive quarter, by 2.7% y-o-y in 1QFY20, while shopper traffic increased 2.8% y-o-y. Actual occupancy for Wisma Atria and Ngee Ann City remained high in 1QFY20, at 99% and 100% respectively, which may indicate that its retail segment (81.5% of Singapore NPI) is stabilising, lifting the pressure on its Singapore operation (68.5% of 1QFY20 NPI).

Starhill Gallery Received Green Light to Start Enhancement Works

• Another positive news is that Starhill Global REIT has recently received all the requisite approvals for the asset enhancement works under the Starhill Gallery master tenancy agreement (MTA) and renovation works have commenced. As such, the annual rent of RM52m (subject to rent rebate of RM26m p.a.) for the first 2 years of the initial 3-year term of the Starhill Gallery MTA has commenced in Oct 2019.
• Starhill Gallery will remain partially open during the asset enhancement works. Completion of the first phase of the asset enhancement works is scheduled for 2020 and the official launch of the revamped mall with hotel rooms is scheduled for 2021. Following the asset enhancement works, Starhill Gallery will be renamed The Starhill.
• Other than this, the REIT is also considering the possibility of unlocking the unutilised 100k sf gross floor area (GFA) between Ngee Ann City and Wisma Atria to tap the growth potential from the upcoming new Orchard MRT station serving the new Thomson-East Coast Line.

Maintain HOLD

• Maintain HOLD and DDM-based Target Price.
• While we see long-term growth potential for Starhill Global REIT, we think it has limited catalyst for now. We are also concerned that the weaker economic conditions may weigh on its office performance, and a weak A$ will continue to dampen its Australia income.
• Upside/downside risks include better/worse rental reversions.

Source: CGS-CIMB Research - 29 Oct 2019