Banyan Tree Holdings (BTH SP) - UOB Kay Hian 2017-09-27: Marketing Trip Takeaways ~ Relaxing Beneath The Banyan Tree

Banyan Tree Holdings (BTH SP) - UOB Kay Hian 2017-09-27: Key Takeaways From Marketing Trip: Relaxing Beneath The Banyan Tree BANYAN TREE HOLDINGS LIMITED B58.SI

Banyan Tree Holdings (BTH SP) - Key Takeaways From Marketing Trip: Relaxing Beneath The Banyan Tree

  • The turnaround story for Banyan Tree (BT) remains intact as management shared their optimism for the future and re-iterated their strategy to offload assets, increase revenue and improve margins. 
  • Management estimates that Banyan Tree’s huge beachfront land in Thailand is worth S$5b-6b in gross developmental value. 
  • We incorporate contributions from its China hotel management JV and the dilution effect from the Accor and Vanke deals. 
  • Maintain BUY and tweak our SOTP-based target price to S$0.92.



WHAT’S NEW

  • We hosted the management of Banyan Tree Holdings (BT) at a non-deal roadshow (NDR) recently. This report highlights the key takeaways from the NDR.


STOCK IMPACT


Beachfront land valued at S$5b-6b. 

  • According to management’s estimate, the company’s huge beachfront landbank in Thailand holds a GDV of S$5b-6b. The current plan will be to develop it over the next 20 years. 
  • There is also a strong pick-up in sales momentum for their existing Thailand properties due to a Russian-led tourism boom following the oil price recovery.

Management optimistic about 2H17 outlook and beyond. 

  • Management is optimistic about its outlook, with a special gain to boost its 3Q17 (seasonally weak quarter) performance following the partial divestments of China assets. 
  • 4Q17 (a seasonally strong quarter) is also expected to outperform with a pick-up in RevPAR underpinned by tourism growth in Thailand. 
  • Moving into 2018 and 2019, management expects 14% CAGR growth organically in terms of hotel management contracts (all signed).

Accor deal set to increase revenue and margins. 

  • Our thesis that the Accor deal will not only bring in revenue but also improve margins has been reaffirmed by management.
  • They can now utilise Accor’s strong sales network (with 250 employees in the business development department) to source for new hotel management contracts as well as their local expertise to handle day-to-day operations while BT focuses on high value-add brand management services. 
  • Moreover, the partnership could bring in more business for BT’s existing hotels worldwide as customers will be able to book BT hotels through Accor’s website which enjoys a good following.

Re-iterating disposal of China hotel assets… 

  • Management re-iterated their plan to dispose of all of its China hotel assets to Vanke (50% of the assets have already been disposed with a put option to dispose the other 50% at market price starting May 18) through a hotel assets JV. 
  • We estimate total disposal consideration to be in the range of S$180m-200m including divestment of its China fund.

…while retaining control of hotel management JV with right of first refusal.

  • However, BT will retain its 40% ownership of the hotel management JV (with Vanke and JV management expected to hold the other 60%). Management shared that this hotel management JV will have a first right of refusal (ROFR) to manage all the hotels under the above-mentioned hotel asset JV. 
  • With Vanke potentially injecting capital or assets (Vanke currently has 13 hotels and is in negotiations to take over more brands such as Clubmed) into the business, management opined that they have found a solid strategic partner as Vanke is ambitious and professional.

Lower overheads and greater economies of scale should provide upside potential.

  • Prior to this deal, BT’s China hotel management business has been loss-making even at the EBITDA level due to high overhead costs (its Shanghai HQ alone hires 100+ staff) with just 15 hotels under management. It has also been plagued by issues of doubtful debts with S$10m provided for in the last two years. 
  • The strong pipeline of deals from Vanke will allow the JV to achieve economies of scale. Hence, there is significant upside risk to our prior EBITDA and profits forecasts as we did not account for lower losses or the possibility of collecting back the doubtful debts.


EARNINGS REVISION/RISK


Placement proceeds to reduce finance expense. 

  • We expect placement of new shares/conversion of debentures to Vanke and Accor totalling 40m shares at a gross consideration of S$48m (S$0.60/share). 
  • With the cash inflow, we see less need for management to draw down debt and expect finance expense to decline further to S$15.2m in 2019 (2016: S$29.6m).

Vanke deal is a positive EBITDA contributor to hotel management services. 

  • A favourable deal structure which involves BT taking a 30% first cut of hotel management revenue changes the status of its exposure to China where its EBITDA loss-making subsidiary turns into a JV which contributes positively to BT’s EBITDA.

Improvement in operating environment already underway. 

  • With RevPAR improvement underpinned by a Russian-led tourism recovery in Thailand, we expect stronger EBITDA contribution derived from organic expansion which is supported by its global partnership with Accor.
  • Despite execution risks, BT’s strategy of achieving an asset-light model by shedding its China hospitality assets while leveraging on its strategic partners to generate new growth for its hotel management services portfolio resonates well with us.

Raising 2017-19 profits forecasts by 2-64%. 

  • We revise our 2017-19 profit forecasts upwards by 2-64% as we account for the positive contributions from its 40%-owned China hotel management JV (assuming three additional hotels p.a. starting from 2018). 
  • Our adjusted net profits exclude a one-off disposal gain from China assets to Vanke.


VALUATION/RECOMMENDATION


Maintain BUY with SOTP-based target price tweaked to S$0.92, implying 48.4% upside. 

  • We incorporate the positive EBITDA contribution from Banyan Tree’s China hotel management JV and account for the dilution from the Accor and Vanke deals, and tweak our SOTP-based target price to S$0.92. 
  • We value Banyan Tree at S$774.7m, 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.




Edison Chen UOB Kay Hian | Yeo Hai Wei UOB Kay Hian | http://research.uobkayhian.com/ 2017-09-27
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 0.920 Down 0.930



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