by winston » Tue Jul 21, 2009 7:59 am
Not vested. From Macquarie ( didn't they use to own this company ? )
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Waiting for the next move
Event
Starhill Global REIT (SGREIT) went ex-rights today, following the announcement of a one-for-one rights issue to raise gross proceeds of S$337m. Maintain Neutral with a revised target price of S$0.53, factoring in
interest savings from paying down debt and an enlarged unit base.
Impact
The rights were priced at S$0.35 per unit, a 45.3% discount to the closing price of S$0.64 at the time of the announcement and 29.3% discount to the theoretical ex-rights price (TERP) of S$0.495. YTL Corporation Berhad (YTLMK, RM6.90, NR) has undertaken to subscribe for a total of up to 75% of the rights issue, including the 26.6% stake held by YTL. Assuming YTL subscribes to 75% of the issuance, its stake in SGREIT would rise to 50.8%.
This rights issue was not expected, as SGREIT's gearing was among the lowest in the sector at 31.3% prior to this rights issue. With the rights offering and adjusting for the latest revaluation, which lowered the valuation of its properties by 7.1% from S$2.10bn to S$1.96bn, SGREIT's gearing would fall to 20.7%. This assumes SGREIT repays up to S$236m of its total debt of S$670m from this exercise. The group does not have any refinancing requirements in 2009 but 93% of total borrowings are due in late 2010.
Apart from debt repayment, the proceeds may be used for acquisition opportunities when they arise as well as for asset enhancement initiatives. SGREIT says that the plot ratio at its Wisma Atria asset is not fully utilised and that it will explore plans to add up to 40,000sqf of retail space, although the maximum allowed is up to 100,000sqf.
Earnings and target price revision
We lower our FY10-11 DPU by 25–30%, factoring in the enlarged unit base, offset by interest savings; as well as higher revenue estimates, as we had underestimated the contribution from its Chengdu mall which is performing better than expected. As a result, our DCF-based target price has been lowered from S$0.66 to S$0.53.
Price catalyst
12-month price target: S$0.53 based on a DCF methodology.
Catalyst: Potential uplift in basement traffic once ION Orchard opens by July, which could boost sales and may provide some support for renewal rents.
Action and recommendation
While the rights issue provides SGREIT with more financial flexibility, we are concerned about the heavy dilution arising from the rights. Also, the market is likely to await and assess the impact from any potential acquisitions in the future. Given the concern over the influx in Orchard Road retail supply from this year, our preference in the retail space is for CapitaMall Trust (CT SP,S$1.50, OP, TP: S$1.60, upside 6.7%) as we believe suburban retail rents will be more resilient than prime in a downturn.
It's all about "how much you made when you were right" & "how little you lost when you were wrong"