Starhill Global REIT - Rights issue overkill

We have downgraded our rating for Starhill Global REIT (Starhill Global) to 3 (Hold) from 2 (Outperform) after the manager’s announcement (on 22 June) of a dilutive one-for-one rights issue. Aside from repaying part of the existing debt, we believe the other uses for the S$337.3m rights issue are highly uncertain and lack sufficient detail. We cannot regard the rights issue or manager’s plans at this stage as compelling.

The rights issue appears excessive, in our opinion, considering that Starhill Global was not even remotely over-geared, at a leverage ratio of 31.1% as at 31 March. Even after the 7.1% asset-value decline (latest valuation as at 15 June 2009) compared with December 2008, the leverage ratio would have increased to 33.4%, hardly overstretched, in our view.

Our earnings (and valuation) scenario assumes that the manager would do nothing with the rights issue except to repay S$236m of debt. We have revised down our distribution-per-unit (DPU) forecasts by 30.6% for FY09, and 47.4% for each of FY10 and FY11, as a result of the rights issue. We have lowered our six-month target price, based on our RNG valuation method, to S$0.47 (ex-rights) from S$0.72 (pre-announcement) previously.

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