SINGAPORE (June 19): OCBC Investment Research is reiterating its “hold” call on Starhill Global REIT (SG REIT) while cutting its lower fair value estimate to 65 cents from 77 cents previously.
The lower fair value is underpinned by reduced distribution per unit (DPU) forecasts and after incorporating a lower terminal growth rate of 1% compared to 1.5% before, as well as higher cost of equity assumption of 8.5% from 8.2% previously in light of current market and sector volatilities.
To recap, SG REIT’s manager recently posted a 7.6% lower 3Q18 DPU of 1.09 cents, marking its seventh consecutive quarter of y-o-y decline, driven by operational weakness from Singapore and Australia, as well as higher withholding taxes from Australia and Malaysia.
In a Tuesday report, analyst Andy Wong notes that while SG REIT is trading at FY19F distribution yield of 7.1% as of its Monday closing price of 66 cents, this is still slightly below its ten-year average forward yield of 7.2%.
He also highlights that the REIT has underperformed its peers with total returns of -12.2% YTD.
Wong attributes the unit price underperformance to tepid DPU performance and a challenging near-term outlook, which has prompted OCBC to lower FY18 and FY19 DPU forecasts by 5.7% and 6.5%, respectively, after accounting for lower rental assumptions, higher effective tax rate and weaker AUD assumptions.
“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,” explains Wong.
On the larger S-REITs sector outlook, he comments: “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.”
As at 11.50am, units in SG REIT are trading flat at 66 cents.
