Broker's take: RHB upgrades Starhill Global Reit to 'buy' on attractive valuation among peers

RHB Research on Wednesday upgraded Starhill Global Reit to "buy" from "neutral" but lowered its target price to 63 Singapore cents from 76 cents on the Reit's "attractive valuation compared to retail peers".

Units of Starhill Global Reit were trading at 55 Singapore cents as at 9.32am on Wednesday, up 1.5 cents or 2.8 per cent.

The Reit is currently trading at a price-to-book ratio of 0.6, compared to a peer average of 1 and a sector average of 1.1. This makes it "a laggard among retail Reit peers in terms of valuation... (with) room for rebound", analyst Vijay Natarajan wrote.

He added that the reason for the valuation gap could be due to investor concerns around the Reit's exposure to high-end retail, the shorter remaining land tenure (41 years) of Wisma Atria mall, and declining average retail rents.

However, Mr Natarajan said that at current levels, "the negatives have been fully priced in".

His expectations for the counter's valuation factor in an additional S$5 million to S$10 million in rental rebates the Reit would have to provide tenants in Singapore under a recently proposed rental waiver Bill.

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"While outlook for the retail sector remains grim, Starhill Global Reit's master/anchor leases, which account for nearly half of its rents, provide some stability," Mr Natarajan added.

"Despite Covid-19, we do not expect any defaults or delays in master lease rental payments as the lessees are still in good financial shape."

The Reit's two master leases - for Ngee Ann City expiring 2025, and for its two Malaysian properties Starhill Gallery and Lot 10 - accounted for 33 per cent of revenue for its third quarter ended March 31.

Mr Natarajan said that the Reit's office portfolio, which accounted for around 15 per cent of its Q3 revenue, was "fairly less impacted" by the Covid-19 pandemic.

He predicted, however, that the pandemic would exert pressure on the Reit's occupancy and rents in the coming years.

Overall occupancy for the Reit's third quarter was 96.3 per cent.