Banyan Tree Holdings Limited – Gathering momentum in management contracts March 8, 2019

PSR Recommendation: ACCUMULATEStatus: MaintainedTarget Price: S$0.76
  • PATMI met expectations excluding the surge in effective tax due to higher withholding tax and under provision of taxes in prior years.
  • Sizable uptick in property sales from Phuket. Secured a record 28 new hotel management contracts in 2018, with a pipeline of 53 hotel openings from 2019 to 2022.
  • Hotel investments segment took a hit from Thailand underperformance and Seychelles deconsolidation effect. Decline in forward bookings, dragged down largely by Thailand.
  • Long-term growth catalysts remain intact. Focus would be the continued build-up in fee-based income and property sales.
  • Maintain ACCUMULATE with adjusted target price of S$0.76 (prev. S$0.73).

 

The Positives

+ Recovery in bulk of fee-based segment revenue. Two of the three components of the fee-based segment – hotel/fund/club management and spa/gallery operations – enjoyed positive growth in 4Q18 after registering close to -20% declines each YoY the same period a year ago. The Group’s efforts to transition to an increasingly asset-light model is building its momentum. Operating profit for the fee-based segment in FY18 recorded a +86% increase YoY.

+ Sizeable uptick in property sales. Revenue for BTH’s property sales segment recorded YoY increases of 61% and 50% for 4Q18 and FY18, respectively. The 61% YoY jump in 4Q18 was driven by the higher handover of units at Cassia Phuket, Laguna Park townhomes/villas and Laguna Village residences, as well as handover of units for Banyan Tree Grand Residences. Operating profit for the property sales segment in FY18 was close to double of that in FY17, albeit recognising less number of units.

 

The Negatives

– Hotel investments segment took a hit from Thailand underperformance and Seychelles deconsolidation effect. The 13% dip in the Group’s largest revenue segment, Hotel investments (c.59% of FY18 revenue), mainly stemmed from Thailand (ongoing renovations at Banyan Tree Phuket and underperformance from Angsana Laguna Phuket due to absence of major events) and Seychelles (deconsolidation effect following disposal of entire assets portfolio in Nov 2018). RevPAR for all hotels under the Group was down 17% YoY on both lower occupancy and lower average room rate.

– Decline in forward bookings, dragged down largely by Thailand. Forward bookings for all hotels were flat YoY in 4Q18 and subsequently dropped 10% YoY in 1Q19. Forward bookings for Thailand (the single biggest geographical contributor by revenue) declined 8% YoY in 4Q18 and 13% YoY in 1Q19, still reeling from the impact by the tragic Phuket boat accident in July 2018 which killed more than 40 Chinese tourists (>40% of the Group’s customer base is from China).

 

Outlook

Despite the continued negative impact from the July 2018 Phuket incident which compressed forward bookings in Thailand through 1Q19, long-term growth catalysts remain intact as the Group transitions to an increasingly asset-light model.

 

BTH managed to secure a record 28 new management contracts in 2018 (FY16: 6, FY17: 3). Based on the current inventory of management contracts secured by BTH, 53 hotels under the Banyan Tree umbrella of brands are slated to open from 2019 to 2022 (Figure 2). The securing of such management contracts, especially with strong partners such as Accor and Vanke, will be the main driver for BTH’s fee-based income.

 

Some of the steps the Group had taken in the past 1-2 years include: 1) the signing of collaboration deals with Accor and Vanke, which include the divestments of China assets; 2) acquisition (and subsequent increase) of stake in Laguna Resorts & Hotels Public Company Limited; and 3) disposal of entire Seychelles assets portfolio with continued operation on a management agreement.

 

Most recently, BTH pared down its stake in Banyan Tree Assets (China) Holdings Pte. Ltd. (BTAC) to 4.2% on 21 Nov 2018 from 50% (50:50 JV) on 10 Aug 2017. BTAC is the holding company for Banyan Tree-branded hotels and assets in China.

 

 

Maintain ACCUMULATE with adjusted target price of S$0.76 (prev. S$0.73).

We adjust our target price to incorporate certain changes to our revenue adjustments and discount to PPE book value. Our target price translates to 0.72x FY19e P/NAV.

 

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About the author

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Tara Wong
Research Analyst
Phillip Securities Research Pte Ltd

Tara covers the REITs and Property sector. Previously a consultant advising listed companies on their investor relations strategy, Tara’s transactions experience includes high-profile M&As, IPOs and privatisations.

She graduated with a Bachelor of Science (Honours) in Banking & Finance from the University of London.

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