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Analysts neutral on Starhill Global REIT as results stood below expectations; Soochow CSSD downgrades to 'hold'

·3-min read

OCBC has given the REIT a target price of 61 cents, while Soochow CSSD has given it a target price of 68 cents.

Analysts from OCBC Investment Research (OIR) and Soochow CSSD Capital Markets have rated “hold” on Starhill Global REIT, with the recommendation from the latter being a downgrade.

The lacklustre recommendation was due to the REIT’s weaker-than-expected results for the 1HFY2021/2022 ended December.

For the 1HFY2021/2022, Starhill Global REIT reported a distribution per unit (DPU) of 1.78 cents, down 5.3% y-o-y, with the decline largely attributed to the $3.1 million in distributions given out in the same period the year before.

On the REIT’s results, the team at OCBC sees some signs of recovery from the Covid-19 pandemic, but it believes that there are still uncertainties and a lack of earnings visibility ahead.

With that, it has lowered its fair value estimate to 61 cents from 64 cents.

“Although some of Starhill Global REIT’s properties are under master leases, the severe and widespread impact of Covid-19 has resulted in management extending, or having the intention to extend some form of rental rebate to its master lessees to share the pain and build a stronger longer-term relationship,” writes the team in its Jan 26 report.

On this, the team has cut its DPU estimates for the FY2022 and FY2023 by 6.8% and 5.3% respectively, due to higher finance costs and lower contributions from Wisma Atria.

In addition to his recommendation downgrade, Soochow CSSD Capital Markets’ analyst Simeon Ang has lowered his target price to 68 cents.

Despite the improvements seen in Wisma Atria in both shopper traffic and tenant sales, Ang expressed his concern on the weaker half-on-half (h-o-h) performance despite the seasonally peak period.

Recent data from the Singapore Tourism Board (STB) suggests that tourist arrivals are weak despite the issuance of over 100,000 vaccinated travel lane (VTL) passes in the 4QFY2021.

To be sure, 2021 tourist arrivals and receipts hit a new low of 330,000 or $1.9 billion, which implies that a revival in tourism in Singapore may be far off, notes Ang.

To this end, Ang believes the outlook for Starhill Global REIT is “less than rosy” with the declining Orchard Road retail rents, and the Toshin rent review coming in June.

The rising cost of equity (COE) and yields may crimp any potential upside to Starhill Global REIT’s unit price as well, adds Ang.

“While Starhill Global REIT is currently trading at -1 standard deviation of its three-year yield spread, we observe that this is actually a normalization to pre-Covid 19 spreads of 460 basis points,” he writes.

“With the global yield environment expected to expand, Starhill Global REIT’s current FY2023 yield of 6.8% could be sticky,” he continues.

Based on his new target price, the REIT would be “valued at a reasonable FY2023 yield and price-to-book (P/B) of 6.4% and 0.84 times, with the latter at the upper bound of its three-year historical P/B range of 0.6-0.9 times P/B.”

“Coupled with rising cost of equity (COE) as well as normalization of yields to pre-Covid levels, we believe that SGREIT is now fairly priced,” he says.

In the same report, Ang has rolled over his valuations to FY2023. He has also introduced his estimates for the FY2025.

Looking ahead, catalysts to Starhill Global REIT could stem from a positive rent review with Toshin as well as mergers and acquisitions (M&A) fuelled by its “fairly low gearing” of 36.1% as at December.

Units in Starhill Global REIT closed 1.5 cent lower or 2.4% down at 61 cents on Jan 28.

Photo: Samuel Isaac Chua/The Edge Singapore

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