Friday 28 June 2013

Starhill Global REIT

OCBC on 27 June 2013

Starhill Global REIT (SGREIT) announced that its convertible preferred unit (CPU) holders have notified the REIT manager of their intention to exercise their rights to convert a total of 152.7m CPUs into new units on 5 Jul. With the conversion, we estimate that the distribution to CPU holders will drop from an average of S$2.4m to just S$0.3m per quarter, leaving a larger distributable amount available to unitholders. However, as the unit base is expected to increase by 10.8% upon the conversion, the net impact is likely a marginal dilution of ~1.1% to pro forma FY12 DPU, according to management. We now factor in the impending CPU conversion into our forecasts. We also update our CAPM assumptions to incorporate the continued increase in risk-free rate. As a result, our fair value eases from S$1.00 to S$0.95. Nevertheless, we continue to like SGREIT for its strong growth potential, robust fundamentals and attractive valuations. Maintain BUY.

Impending conversion of CPUs
Starhill Global REIT (SGREIT) announced that its convertible preferred unit (CPU) holders, namely YTL Hotels & Properties Sdn Bhd and YTL Corporation Berhad, have notified the REIT manager of their intention to exercise their rights to convert a total of 152.7m CPUs into new units on 5 Jul. Following the conversion, the total units outstanding is expected to increase from 1,943.0m to 2,153.2m units, while the number of CPUs will decrease from 173.1m to 20.3m CPUs.

Background on CPU issue
SGREIT had on 28 Jun 2010 issued the CPUs as part of the consideration of its two Malaysia properties, Starhill Gallery and Lot 10 property. All the CPUs in issue now are held by YTL Corporation and its subsidiaries, and are convertible into ordinary units from 28 Jun onwards at a conversion price of S$0.7266 per CPU. The CPU holders are entitled to a discretionary, non-cumulative variable SGD coupon of up to M$0.1322 per CPU, representing a distribution rate of 5.65% per annum on the principal amount of M$405.0m of CPUs.

Impact from CPU conversion
With the conversion, we estimate that the distribution to CPU holders will drop from an average of S$2.4m to just S$0.3m per quarter, leaving a larger distributable amount available to unitholders. However, as the unit base is expected to increase by 10.8% upon the conversion, the net impact is likely a marginal dilution of ~1.1% to pro forma FY12 DPU, according to management. The book value per unit, similarly, is expected to ease slightly from 87.9 S cents to 86.5 S cents, based on our projections.

Maintain BUY
We now factor in the impending CPU conversion into our forecasts. We also update our CAPM assumptions to incorporate the continued increase in risk-free rate. As a result, our fair value eases from S$1.00 to S$0.95. Nevertheless, we continue to like SGREIT for its strong growth potential, robust fundamentals and attractive valuations (0.95x P/B, 6.1% forward yield). Maintain BUY.

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