Banyan Tree Holdings (BTH SP) - UOB Kay Hian 2017-09-12: Sunny Turnaround Just Ahead

BANYAN TREE HOLDINGS LIMITED B58.SI

BANYAN TREE HOLDINGS (BTH SP) - Sunny Turnaround Just Ahead

A global hospitality giant and born-and-bred Singapore brand, Banyan Tree is executing a comprehensive strategy for a sunny turnaround.
We believe the Accor and Vanke deals as well as its own internal improvements will bring about revenue growth, improved margins and a healthy balance sheet. This puts the Banyan Tree turnaround story firmly in place with 35.4% 2016-19 EBITDA CAGR and deep book value.

Initiate coverage with BUY and SOTP-based target price of S$0.93.

INVESTMENT HIGHLIGHTS

Initiate coverage with BUY and SOTP-based target price of S$0.93, implying a 45.3% upside.

We value Banyan Tree (BT) at S$707.6m, based on 12.9x 2018F EV/ EBITDA for its hotel management services (10% discount to peers’ average), and 0.6x of the cap value for its hotel/property development businesses.
We also believe there is significant hidden value in its property assets.
Given the deep discount, we believe now is an opportunity for investors to go in at prices slightly above strategic partners’.

Growing revenue through existing and new channels.

We expect fee income to accelerate through the Accor partnership (which will help Banyan Tree grow the pie, particularly into international capital cities, via Accor’s network) as well as the Vanke deal (where a JV will replicate Accor’s fee sharing benefits).
Banyan Tree’s organic growth will also continue with a 10-15% growth target of new 4-5 hotel management contracts per year. We expect revenue to grow from S$309.6m in 2016 to S$365.4m in 2019.

Improving margins by focusing on premier-brand management and optimisation.

Banyan Tree’s expertise is in brand management (Banyan Tree was ranked 52th in Brand Finance’s 2016 Top Singapore Brands with US$112m brand value as well as numerous awards along the way). The Accor deal will see Banyan Tree:
1. focusing on its higher-margin brand management and leaving day-to-day operations to Accor;
2. consolidating operations to a central office, and minimum overheads as well; and
3. incurring lower commission through Accor’s network.
Internally, Banyan Tree will be rationalising its operations, putting in cost-cutting measures to increase productivity. As such, we expect EBITDA margins to improve from 7.1% in 2016 to 15.0% in 2019.

Building a healthy balance sheet through asset-light approach.

Through its current share and mandatory convertible placements to Accor and Vanke as well as the current and eventual offloading of its China assets, we expect Banyan Tree’s net debt to fall to S$255.9m in 2019 from S$507.8m in 2016.
Similarly, financing costs are expected to drop to S$17.8m in 2019 from S$29.6m in 2016 while further asset-light growth can be achieved through the Accor partnership.

Significant hidden book value as land and property were booked at cost.

We believe there is significant hidden book value for Banyan Tree’s landbank and property assets as these were recorded at historical cost and there have been substantial increases in their economic value and conditions. We understand Banyan Tree is looking for a third-party valuer to unlock the hidden values, allowing investors to understand the hidden goldmine within Banyan Tree.

Turnaround story in place with dividend resumption likely.

We believe Banyan Tree’s turnaround story is firmly in place and expect EBITDA (which excludes lumpy disposal gains) to grow from S$22.0m in 2016 to S$54.7m in 2019 at a CAGR of 35.4%. Lumpy earnings with flowing profits and a healthy balance sheet, we expect Banyan Tree to resume paying dividends in 2017.

VALUATION

Initiate coverage with BUY and SOTP-based target price of S$0.93.

Riding on the back of global tourism growth and economic recovery, we like Banyan Tree for its:
1. solid market positioning as the leader in luxury resort experience,
2. focus on an asset-light approach in hotel management services and brand management,
3. new revenue channels through synergistic partnerships with key industry players such as Vanke and Accor,
4. potential full divestment of its remaining China assets, and
5. attractive valuation and potential resumption of a dividend in 2017.
We value Banyan Tree at S$707.6m, or S$0.93/share, based on the following SOTP valuation: 12.9x 2018F EV/EBITDA for its hotel management services (10% discount to peers’ average), 0.6x of the cap value for its hotel and property development businesses, and 1.0x of the market value of its 6.6% stake in listed Thai associate, Thai Wah (TWPC TB).
We project core EBITDA CAGR of 35.4% for 2016-19. We expect a surge in revenue and an accompanying margin expansion in hotel investment and hotel management services based on:
1. revenue growth through existing and new channels,
2. focus on premier-brand management and optimisation, and
3. changing consumption pattern towards environmentally and socially responsible products.

Conservative profit forecasts.

Despite expectations of a global economic recovery by the International Monetary Fund, our profit forecasts for Banyan Tree remain conservative as we assume a 4% decline in average daily room rate and an average occupancy at 56% in 2017-19. Revenue per key for hotel management services through organic expansion will also decline by 10% while Banyan Tree continues to sustain current margin levels.
We based our number of hotel rooms on management’s projected organic expansion of 6,486, 7,564 and 8,725 in 2017-19 respectively.
We note that the inclusion of Banyan Tree offerings on Accor’s global sales and booking networks as well as its exclusive loyalty programme could drive BT’s occupancy rates higher as the clientele for higher-end product offerings is less likely to be swayed by price points but by experiences.

Accor and Vanke deals to drive hotel management services.

Realistically, we expect hotel management services contracts to bear fruit after 2017 due to the likelihood of the group exploring greenfield projects. We expect an annual uptake of three hotels by Banyan Tree through Accor.
While potential revenue derived through design services may be immediate, we assume profitable operations only in 2018-19.

PEER COMPARISON

Hotel management services: Fair value at 12.9x 2018F EV/EBITDA, or 10% discount to peers’ average.

Global peers are trading an average EV/EBITDA of 14.3x. We opine that it is more than fair for Banyan Tree to trade at a 10% discount to peers’ average due to the embedded brand value intrinsic within the multiple.
The market has largely ignored Banyan Tree’s hotel management services business due to its lower visibility vs the hotel investment business, resulting in a lack of understanding of its operating environment and its core value in the Singapore market.
Given Banyan Tree’s status as an established Singapore company with a portfolio of well-recognised brands and strong market positioning, it is more than fair for Banyan Tree’s hotel management services to trade at 12.9x 2017F EV/EBITDA, or at a 10% discount to peers’.

Owned properties and property development: Fair value at 40% discount to RNAV.

Our fair value applies a punitive but more-than-fair 40% discount to RNAV due to three key reasons:
1. the bulk of the RNAV is positioned in Banyan Tree’s core market of Thailand which we believe will enjoy significant tailwinds in 2017-19,
2. undeveloped landbank such as Northpoint Surfers Paradise were bought many years ago and should have enjoyed a fair amount of capital appreciation, and
3. management’s track record in land development in Thailand; expedient project completion while seeking substantial development margins.

BUSINESS OUTLOOK

New Strategy to Invoke Change

New strategy to address obstacles and invoke change. To address the obstacles which Banyan Tree has been facing in recent years, management has embarked on a new strategy which we identify as three main prongs:
1. building a healthy balance sheet through an asset-light approach,
2. setting sights on growing revenue through existing and new channels, and
3. improving margins by focusing on premier-brand management and optimisation.
This can be seen through the two latest key deals Banyan Tree has inked with Accor and China Vanke.

Accor will take about 5% stake in Banyan Tree.

The Accor deal is two-fold. First, Accor will subscribe for S$24m of mandatory convertible debentures. Within the first 4.5 years, these will be converted at S$0.60/share if the preceding volume weighted average price (VWAP) hits S$0.60 or higher. This will be equivalent to about a 5% stake. We believe this is likely to happen sooner rather than later.
However, there is also a failsafe, where it will be converted at the 4.5-year mark at the lower of S$0.60, or 115% of VWAP, subject to a price floor of S$0.47. Once converted, Accor will receive a six-month option to acquire up to 10% of Banyan Tree (including shares for the Vanke deal) at 115% of VWAP preceding option exercise.

Banyan Tree to co-develop hotels with Accor, focusing on brand management.

The second part of the Accor deal is the collaboration between the two hospitality giants for an initial term of 10 years. They shall co-develop hotels and branded residences under BT’s brands except for regions that Banyan Tree holds exclusivity. These projects will be managed by Accor under the brand standards required under each applicable Banyan Tree brand while Banyan Tree will continue to undertake brand management activities.

Vanke deal will see Vanke taking an S$24m stake into Banyan Tree...

The Vanke deal has multiple components. First, Vanke will subscribe for 40m new Banyan Tree shares (~5% of total) at S$0.60/share, or around S$24m, with an option (until five market days before Banyan Tree’s 2018 AGM) to subscribe for another 16.8m shares (around 2.2% of current outstanding shares). Should Vanke exercise the option, it will be given another option (until six months from exercise/expiry of Accor option) to subscribe for new shares, resulting in it owning 10% of Banyan Tree.

… and Banyan Tree receiving S$90m for its China hotel assets and operations.

Second, Banyan Tree and Vanke will start a JV company called Banyan Tree Assets (China) (BTAC) with a 50:50 spilt. Banyan Tree will inject its hotels and real estate assets in China (the bulk of it being Banyan Tree Lijiang). In return, Banyan Tree will effectively receive around S$81m cash (subjected to post-completion adjustment) from Vanke for its hotel assets in China, which should result in a special gain of about S$39m.
Thereafter, Banyan Tree, BTAC, MCo (a special holding company which we believe to be related to Vanke) will own 40%, 40% and 20% respectively of Banyan Tree Hotel Management (China) Pte Ltd (BTMC, responsible for the hotel and resorts management business) and Banyan Tree Services (China) (BTSC, responsible for its spa and gallery operations, design and technical services). MCo will pay a total of around S$8.9m to subscribe for new shares in BTMC and MTSC.

Expecting Vanke to buy out BT’s stake in BTAC next year.

We expect Vanke to:
1. buy out Banyan Tree’s remaining stake in BTAC next year (at S$81m, which would yield another S$39m in special gains), and
2. continue to inject assets into BTAC (Vanke currently has 14 hotels under the group), turning it into an asset arm for Vanke’s hotels with the ultimate stage of listing in the Shanghai A-share market.

FINANCIAL OUTLOOK

Hotel investments benefitting from stronger global economic growth.

Driven by a wider growth in Banyan Tree’s core market in Thailand but taking into consideration possible interest-rate pressure, we assume a 4% reduction in the average daily room rate as well as a 12% increase in owned hotels in 2017-19.
We believe these assumptions are conservative given that a 20% increase in owned hotels saw a 10% reduction in the average daily room rate in 2014-16, where Banyan Tree’s core market in Thailand suffered disruption due to political and economic events.
We believe access to Accor’s global sales and booking networks and its exclusive loyalty programme will further augment demand for Banyan Tree’s offerings, driving its sustainable occupancy rate to 56% or higher.

New channels to accelerate fee income.

We factor in the Accor deal into our 2018 forecast and expect Banyan Tree to add up to three hotels to its management portfolio every year.
We do not include any Vanke-related hotel additions due to the greater uncertainty. We view this as a realistic estimate, considering the scale at which Accor develops new hotels every year.
Our key assumptions are:
1. 158 average key per hotel,
2. S$2,500 per key management revenue, and
3. 70% EBITDA margin.
While fee sharing and royalty fees may vary within a range, our estimate of S$2,500 management fees per key is conservative as this is slightly more than half of BT’s 2016 hotel management services revenue per key of ~S$4,200. The higher EBITDA margin of 70% is reasonable after taking into account the economies of scale that may be derived as a result of brand management as compared with operations management.

Growing hotel management services through existing channels.

Organic expansion of hotel management is expected to continue with a 10-15% growth target of 4-5 hotels per year, and a steady pipeline of growth in terms of number of room keys with 13 hotels and resorts under construction and another 23 under development.
We factor implicit start-up costs, such as low occupancy, which affect operating contracts that are typically entered into for hotel management services through organic expansion, the demand shift through Accor’s global sales network and Vanke’s database of 9m customers. However, due to the new number of hotels coming up, there may be some impact on per key hotel services revenue and margins in the short term for its organic businesses.

Property development continues apace…

With its resources freed through the Accor and Vanke deals, Banyan Tree can also focus on more lucrative projects such as property development in Thailand where it is doing well.
While land under development was bought at a cheap price in the distant past, we have conservatively assumed gross margin for property development at 10-15%. However, due to point-of-completion revenue policies, revenue and EBITDA have been lumpy.
With the completion of well received projects in Thailand, Indonesia and China, we expect positive EBITDA of S$9.9m, S$10.8m and S$12.0m in 2017-19 respectively.
While management continues to flag caution on its Australia developments, we think there is still comfort to be drawn. For example, while the Northpoint Surfers Paradise development has been delayed pending Banyan Tree’s search for a viable co-developer, prices of Gold Coast land continue to soar as the infrastructure development in preparation for Commonwealth Games 2018 leaves a lasting positive impact in connectivity.
According to our channel checks, land prices per square metre have risen 13% since Banyan Tree’s purchase.

…while contributions from other fee-paying segments are expected to fall.

Design services have been hit by a slowing Chinese economy which had affected the progress of several development projects owned by third-parties. Despite the potential for more design services coming on-stream through Accor and management’s continued emphasis on scaling down the architectural and design division to reduce costs, we conservatively assume continued losses in 2017 in the same magnitude as in 2016.
We expect Banyan Tree to break even after every two design contracts in 2018-19.

Capital injection and asset-light approach to create a stronger balance sheet.

An expectation of a full divestment of its China assets and equity injection into Banyan Tree by 2018 will culminate into a lower net debt of S$255.9m in 2019 from S$507.8m in 2016. With a strengthening balance sheet, dividend resumption is on the cards.
Bearing in mind the need to reduce gearing while rewarding shareholders for their support, we expect dividends to resume in 2017 at a symbolic 1.0 S cent per share each in 2017-19.

COMPANY BACKGROUND

Deep Brand Value

A leading upmarket chain of luxury hotels, resorts and spas. Banyan Tree is a leading international operator and developer of premium resorts, hotels, residences and spas, with 37 hotels and resorts, 64 spas, 77 retail galleries, and three golf courses in 28 countries (as of 27 Jun 17). It operates three integrated resorts through 65.8%-owned Thailand-listed Laguna Resorts Hotel & Hotels (LRH TB).
Pioneering concepts that have become the signature features for many hotels and resorts such as the tropical garden spa and pool villa, Banyan Tree is one of the most ambitious and iconic chains of up-market luxury hotels, resorts and spas.

The Banyan Tree brand is worth US$112m, 52th most valuable Singapore brand.

Banyan Tree’s primary business is centred on four brands: the award-winning Banyan Tree and Angsana, as well as newly established Cassia and Dhawa.
According to Brand Finance’s Singapore Top 100 Brands 2016, the Banyan Tree brand was the 52th most valuable Singapore brand worth US$112m, close to brands like BreadTalk, Yeo’s and Courts.

Banyan Tree received over 1,800 awards and accolades.

Since the launch of the first Banyan Tree resort, Banyan Tree Phuket, in 1994, Banyan Tree Hotels & Resorts has grown into one of Asia’s most successful hospitality brands with numerous international awards and accolades from publications like the prestigious Condé Nast Traveler and others.
Banyan Tree has received over 1,800 awards and accolades for the resorts, hotels and spas that the group manages.

RISK FACTORS

Execution risk.

While Banyan Tree has a good plan in place to overcome obstacles, execution risk still exists. The actual benefits of the Accor deal (beyond the share placement) as well as its own internal rationalisation/optimisation (whether it can maintain its brand value while optimisation costs improvements will depend on how well the plan is executed.

Geopolitical risks and external events affecting tourism/property development.

The hospitality/property development industry is extremely susceptible to external events such as natural disasters, economic slowdown or even a disease outbreak. For example, Banyan Tree is facing slowdowns in Thailand due to the current geopolitical environment and the volatility of this situation could increase in the upcoming 2018 Thailand elections.
However, Banyan Tree has typically weathered past events well with its strong branding.

Property development risks.

There are a couple of more specific risks facing Banyan Tree’s lucrative property development business.
The legal dispute regarding its Laguna subsidiary is currently pending appeal at the Supreme Court, while another risk is the possibility of slower sales in its Australian development.

Foreign-currency fluctuations.

As Banyan Tree’s businesses span across the globe, it will inevitably be exposed to fluctuations in foreign currencies vs its reporting currency in S$.
Nonetheless, its business is fairly well diversified though with significant exposure to Thailand and China.

Edison Chen UOB Kay Hian | Yeo Hai Wei UOB Kay Hian | http://research.uobkayhian.com/ 2017-09-12

UOB Kay Hian SGX Stock Analyst Report BUY Initiate BUY 0.93 Same 0.93