• Revenue and PATMI were below our expectations due to the non-consolidation of revenue from Seychelles and timing differences in the recognition of property sales.
• S$221mn of properties sold yet to be recognised as revenue.
• Forward bookings fell after a brief rise in 2Q19, down 6% YoY for 3Q19 (-8% YoY for Thailand market and flat for Non-Thailand markets).
• Hotel investments segment still suffering from Thailand underperformance, stemming from the inventory shortage from ongoing renovations at flagship resort Banyan Tree Phuket.
• Long-term growth catalysts remain intact. The focus would be the continued build-up in fee-based income as nine spas are to be launched under management in the next 12 months.
• Maintain ACCUMULATE with a lower target price of S$0.51.

The Positive

+ Effective cost management almost across the board. Total costs and expenses were down more-than-proportionately compared to the decline in revenue, attributable to all expense categories except other operating expenses. Administrative expenses were lower YoY in 2Q19 mainly due to lower legal and professional fee and lower operating lease expenses, partially offset by a loss on disposal of PPE and foreign exchange loss. There were lower provisions for bonus and incentives, lower marketing expenses for hotels and property sales. Other operating expenses were higher due to higher travelling expenses and higher expenses for the online booking system.

The Negatives

– Hotel investments segment still suffering from Thailand underperformance. Hotel Investments declined 13% YoY due to non-consolidation of revenue from Seychelles, which was divested in November 2018. Thailand continues to drag earnings, with Thailand RevPAR decreasing 13% YoY to S$125 in 2Q19. Ongoing renovations at Banyan Tree Phuket (c.60% of Hotel Investments segment) – which is expected to complete by end-2019 – was the main reason for weaker bookings. The weaker Thailand performance was partially offset by an improvement in RevPAR in  Maldives, which was up 12% to S$191 due to higher occupancy.

– Property sales segment down due to timing of revenue recognition. There were a lower number of properties recognised as revenue due to timing differences. A total of 7 units of Cassia Phuket, Cassia Bintan and Laguna Park were recognised in 2Q19, as compared to 35 units recognised in 2Q18.

Outlook

Going forward, underperformance in Thailand will continue to impede earnings due to one-off events such as the inventory shortage at Banyan Tree Phuket. That said, we expect earnings to recover once renovations are completed. Earnings would also be boosted by nine new resorts which would be opened in the next 12 months.

On property sales, total unrecognized revenue as at end-2Q19 stood at S$221.5mn (end-2Q18: S$202.3mn), of which c.40% will be recognised through 2H19. Management provided that Cassia Phuket (Phase 3), Laguna Park townhomes/villas (Phase 2) and Banyan Tree 3 Beds Pool Villas would be completed in 4Q19, which would allow the group to recognise revenue of ~S$84.0mn during that period.

We believe fee-based income will remain resilient and is poised to be the key growth driver with a ramp-up of its China operations from its partnership with Vanke. Long-term growth catalysts remain intact as the Group transitions to an increasingly asset-light model. Based on the current inventory of management contracts secured by BTH, 53 hotels under the Banyan Tree umbrella of brands are stated to open from 2019 to 2022. We expect fee-based income to resume growth with nine spas to be launched under management in the next 12 months.

Maintain ACCUMULATE with a lower target price of S$0.51.

Our target price translates to a 0.6x FY19e P/NAV.