Results in line. YTL Starhill Global REIT reported 2Q14 revenue of S$48.4m (-1% y-o-y), and NPI of S$39.2m (+0.2%). Weaker headline numbers were attributable to poorer contribution from overseas assets, although this was partially mitigated by a robust performance of the Singapore portfolio (+3.6%). Income distributable to unitholders rose 5% y-o-y due to net savings from interest rate caps and swaps, translating to a DPU of 1.25Scts (+5%). 1H14 DPU of 2.49Scts comprises 49% of our FY14 estimates.
Headwinds abound overseas. 2Q14 was marked by declines in revenue contribution across the overseas portfolios. In China, stiff competition from new malls coupled with the ongoing clampdown on luxury gifts resulted in a 31% decline in topline. The Manager’s outlook for China remains gloomy, with further (albeit smaller) declines in contribution down the road, and we understand that the Manager is contemplating the possibility of divesting the asset, although there is no hurry to do so. Meanwhile in Malaysia, the decline in topline was due to the adoption of straight-line accounting, although looking ahead, higher property taxes are likely to erode the uplift from higher master lease rents which were achieved last year. Slightly weaker results from Australia (-2.7%) were attributable to the weaker AUD.
Marginal impact on Plaza Arcade’s earnings in preparation for AEI works. Development approval for phase 1 of AEI works at Plaza Arcade has been submitted to the City of Perth, a process which we understand will take c.5-6 months, bringing estimated completion date to 1H16. As part of the AEI works, the Manager intends to revamp street facing shops and activate retail space on the higher floors to create multi-storey retail shops. We understand that c.3k of existing NLA will be affected by the renovation works, although this should be more than offset by additional space on the higher floors. We are positive about this development, but we estimate that contributions will only come in the medium term.
Recommendation
Maintain HOLD, TP S$0.85. We have adjusted our FY14/15F earnings estimates slightly downwards on weaker contribution from China. Accordingly, our TP is lowered to S$0.85, representing a target DPU yield of 6.0-6.3%, which is fair in our view.
With limited upside to TP, we maintain our HOLD call. Catalysts are likely to hinge on
(a) asset disposal and
(b) better than expected operations in Singapore.
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