Starhill Global Reit

CIMB Research on 16 June2013

WE are slightly negative on Starhill's sponsor, YTL Group's decision to convert its convertible preferred unit (CPU) holdings given the 1-3 per cent dilution to FY2013-2015 distribution per unit (DPU), though this is offset by a higher sponsor stake post-CPU conversion.

Maintain "neutral" on valuation grounds.

We lower FY2013-2015 DPUs by 4-6 per cent, factoring in dilution from the CPU conversion and adjustments to our Singapore rental estimates, offset partially by a 6.7 per cent rental uplift from the Toshin master lease beginning June 2013.

Our dividend discount model- or DDM-based target price drops marginally to $0.93 (discount rate: 7.6 per cent).

We see potential re-rating catalysts in asset enhancement initiatives and accretive acquisitions.

What happened: Starhill has received notices from YTL Hotels & Properties and YTL Corporation, both under its sponsor (the YTL Group) that each intends to exercise its rights to convert in aggregate 153 million convertible preferred units (CPUs, out of a total 173 million issued in 2010) into new units of Starhill Global Reit (SGReit) on July 5, 2013, at a conversion price of $0.73/unit.

This will raise the group's stake in SGReit from 29 per cent to 36 per cent.

The CPUs were issued by SGReit in June 2010 to fund the acquisition of Starhill Gallery and Lot 10 in Malaysia.

What we think: The conversion price of $0.73 is 17 per cent below the closing price of $0.88 last Friday. Based on our estimates, the dilution from the conversion is approximately 1-3 per cent for FY2013-2015 DPUs.

As a result of the enlarged share base, pro forma NAV per unit will also drop by 10 per cent post-CPU conversion to about $0.87/unit.

We view this event as a marginal negative, given the dilution and a lost opportunity of a potentially accretive redemption by SG REIT. That said, dilution is fairly minor, with some marginal positives stemming from a higher stake to be held by the sponsor post-CPU conversion.

What you should do: We remain "neutral" on SGReit as we see positives from rental reversions largely priced in, with the stock trading at 1.0x proforma P/BV, above its five-year historical average of 0.7x.

NEUTRAL