(Stocks Discussion) SGX: Banyan Tree Holdings Limited (SGX: B58)?

TL;DR: Here to update on Banyan Tree’s 1Q2019 performance. Overall, they showed a poor performance YoY, but some are one-off events. The outlook on Banyan Tree is pretty positive, and an increase in revenue will be expected in subsequent quarters.

Business overview

Banyan Tree Holdings Limited (“Banyan Tree”) is the operator and developer of premium resorts, hotels, residences and spas, in 23 countries. As of 31 March 2019, they have 47 hotels under them. Their primary business is centred on four brands: Banyan Tree, Angsana, Cassia and Dhawa.

Share price

Currently, Banyan Tree is trading at $0.530 (as of writing on 23 May 2019), with the 52week L/H at $0.480/$0.615.

Financials

Poor performance is seen in 1Q2019. Their revenue decreased 17% and net profit dipped 73% YoY. Why did it drop so much?

Firstly: Hotels investment segment

• Hotel Investments segment achieved revenue of S$60.2 million in 1Q19, a decrease of 12% from 1Q18, mainly from Seychelles and Thailand.
• Banyan Tree disposed of the entire Seychelles portfolio in Nov 2018, which led to their decrease in revenue (S$5.7 million).
• In Thailand, there is an inventory shortage due to ongoing renovations at Banyan Tree Phuket. Available rooms available hence decreased, lowering revenue (S$3.7 million).
• In the Maldives, revenue increased (S$1.0 million).

Secondly: Property sales segment

• Revenue from the Property Sales segment decreased by S$8.3 million in 1Q2019

Moving forward

• The Group mentioned that the unrecognised revenue as at 31 March 2019 was S$222.1 million as compared to S$209.8 million as at 31 March 2018, and 40% will be recognised in the next few quarters of 2019.
• Banyan Tree Phuket is expected to complete renovations by end 2019. As the number of rooms available increases, we can see the increase in revenue, cushioning the $3.7m decrease.
• In their press release, they stated that hotel forward bookings for owned hotels for 2Q19, overall forward bookings is 11% above the same period last year. This would mean a greater inflow of revenue.

Conclusion

Beta of Banyan Tree is 0.29 (Yahoo Finance), which means that the correlation to the market is pretty low. Maybe it is a stock worth looking into now. Since the market has a lot of downside risks, a low beta would mean less volatility. Moving forward though, their revenue is expected to increase, especially after recognition of unrecognised revenue and completion of Phuket’s renovations. However, this may be partially offsetted by bad market conditions which could lead to lower hotel bookings.

TL;DR Banyan Tree seems to have poor cashflow position with negative free cashflow due to low operating cashflow and high CAPex and investments cost. Their stocks also have high market risk and global exposure.

Business Profile

Banyan Tree Holdings is quite a renowned company in Singapore as well, especially for their lifestyle services and resorts. They develop, operate, and manages resorts, hotels, residences, and spas in Singapore, South East Asia, Indian Oceania, the Middle East, North East Asia, and internationally.

Financials

Income Statement

The bulk of revenue is derived from the South East Asian (2/3 of revenue) while hotel investments contributed the highest revenue at 2/3 of revenue as well. Income stream stayed relatively similar than FY17 because other income decreased because of lower gain on disposal of investments in FY18. There was a reduction in expenses of salaries and administration over the year. With higher finance costs, profit after tax stayed almost the same from FY17 to 18.

Balance Sheet

Current ratio stayed relatively similar to FY17 as 1.33. This implies that short-term liquidity should be improved over time to reduce liquidity risk. Net Debt/Equity ratio improved over the years to 0.47. However, this seems to suggest that more improvements can be made to reduce leverage so as to reduce finance cost and long term solvency risks.

Cashflow Statements

Cashflow from operating activities was 18m for FY18, much stronger than FY17 which had negative operating cashflows. This was helped by higher net profit but weaker working capital conditions from increase in receivables reduced cashflows.

Cashflow from investing activities experienced a significant gain of 11% due to significant proceeds of 71m from a disposal of a joint venture. Acquisition of joint non-controlling interest was almost 60m, with a large 27.5m in capital expenditures.

Cashflow from financing activities experienced a huge negative outflow of 34m due to repayment of debt, despite more debt being taken on this year.

Free cashflow was negative for FY18 again, due to weak operating cashflows and high capital expenditures and investments in associates. Hence, dividends as % of FCF is negative. With a dividend payout ratio of more than 50% as well, dividend payouts don’t look sustainable at all.

Prospective Developments

Strong Brand Equity

In the company’s prospectus, they have stated how strong brand equity developed by years of experience and expertise have warranted a brand name that is recognised throughout the industry. Future developments thus have greater merit if the firm continues their expansion regionally.

Regional Diversification of Properties

Having properties spread throughout Asia and across the world helps to reduce regional specific risk. This allows the firm to hedge against volatility in tourism drivers on a regional basis due to economic growth.

Concentration Risk in Luxury Services

With 81% of revenue coming from hotels and management services, this results in high exposure towards the tourism and hotel industry. Moreover, its other services like spa operation is also tied to such services. If the hotel or tourism sector is affected, earnings will be affected very heavily.

Moreover, since such services are considered luxury services, consumers tend to cut down on such spending during downturns. Earnings are therefore more heavily affected.