• Starhill Global REIT's 1HFY6/20 DPU of 2.6 Scts (-0.9% y-o-y) came in within our expectations.
• Stronger performance from Wisma Atria retail was offset by weaker performances from other assets and AEW at Starhill Gallery, Malaysia.
• Reiterate HOLD, with an unchanged DDM-based Target Price of SGD0.75.
• Limited catalysts for now.

1HFY6/20 DPU Came in Line

• STARHILL GLOBAL REIT (SGX:P40U) posted a 1HFY20 DPU of 2.26 Scts (-0.9% y-o-y and flat q-o-q), in line at 50.7% of our full-year forecast.
• 1HFY20 revenue declined by 6.2% y-o-y to S$96.7m, while NPI dropped by 7.3% y-o-y to S$74.1m, due mainly to income disruption from the planned asset enhancement works (AEW) at Starhill Gallery in Malaysia. It was also impacted by the weaker performance by Myer Centre Adelaide, its office portfolio in Singapore, and the depreciation of the A$ against the S$.
• Excluding Starhill Gallery, the 1HFY20 revenue and net property income (NPI) would have been down by 1.4% and 1.1% y-o-y, respectively. DPU declined by a smaller quantum y-o-y as the income disruption at Starhill Gallery was mitigated by its manager receiving part of its base management fees in units.

Singapore Operations Improving, Driven by Wisma Atria Retail Asset

• Wisma Atria’s retail portion continued to deliver positive y-o-y NPI growth, against a 4% revenue growth in 2QFY20 (its first y-o-y revenue growth since 2Q2018). Wisma Atria’s tenant sales increased by 13% y-o-y to more than S$55m (its highest since 1Q2018), despite a 3.7% y-o-y drop in traffic in 2QFY20. This offset the weaker performance of Ngee Ann City (NAC) retail and Singapore offices, resulting in a relatively flat overall Singapore revenue of S$63.2m in 1HFY20 (-0.5% y-o-y), which accounted for 65.4% of total 1HFY20 revenue.
• Weaker 1HFY20 revenues from Wisma Atria office (-3.4% y-o-y) and Ngee Ann City (-5.3% y-o-y) were due to lower overall occupancies and average rents. While Wisma Atria’s actual office occupancy improved by 3.6% pts q-o-q to 91.3%, the overall Singapore occupancy declined by 4.4% pts q-o-q to 89.2% in 2QFY20, due mainly to the pre-termination of a single tenant at Ngee Ann City.

Overall Weaker Performance From Main Overseas Assets

• Australia’s revenue and NPI declined by 5.5% and 7.3% y-o-y in 1HFY20, respectively, due mainly to the depreciation of the A$ against the S$ and lower contributions from Myer Centre Adelaide (retail), which was partially offset by higher contributions from Australia’s office portfolio. Australia’s actual office occupancy improved from 75.2% in 1QFY20 to 94.5% in 2QFY20.
• Malaysia revenue declined by 34.7% y-o-y to S$9.1m, due mainly to income disruption from the planned AEW at Starhill Gallery.

Reiterate HOLD

• Maintain HOLD, with an unchanged DDM-based target price.
• We think SG REIT has limited catalysts for now. We are concerned that the weaker economic conditions may weigh on its office performance and a weak A$ will continue to dampen its Australian income.
• Upside/downside risks include better/worse rental reversions.

Source: CGS-CIMB Research - 29 Jan 2020