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Banyan Tree prepares for tougher near-term outlook; property sales segment records growth

Amala Balakrishner
Amala Balakrishner • 5 min read
Banyan Tree prepares for tougher near-term outlook; property sales segment records growth
SINGAPORE (Apr 8): Resort operator Banyan Tree Holdings has turned in a mixed report card for the financial year ended Dec 31, 2018. It suffered some pressure on its room and occupancy rates but managed a marginal increase in overall earnings.
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SINGAPORE (Apr 8): Resort operator Banyan Tree Holdings has turned in a mixed report card for the financial year ended Dec 31, 2018. It suffered some pressure on its room and occupancy rates but managed a marginal increase in overall earnings.

The company grew its earnings by 4% y-o-y to $13.5 million. Revenue in the same period also increased 4% to $329 million. The level of dividends the company plans to pay out for FY2018 mirrors its marginal increase in earnings: 1.05 cents per share, versus one cent paid in FY2017.

Banyan Tree’s core earnings are derived from owning and running resorts. How ever, as part of its asset-light strategy, it has in recent years sold villas and other properties. It also leases back the properties from the owners as part of a leaseback scheme, and collects a fee income from the management of these resorts.

With this multi-prong strategy in place, the company’s focus is to build on its existing business segments. However, it will not dilute its well-regarded brand. Banyan Tree does “not wish to be the Pierre Cardin of the hotel industry”, said executive chairman Ho Kwon Ping at the company’s recent results briefing, referring to the French fashion designer whose namesake brand is tacked to products ranging from perfume and jewellery to furniture and museums.

Banyan Tree was incorporated in 2000 by Ho and his wife Claire Chang. While its head office is located in Singapore, it has expanded into 23 countries. It owns and/or runs a total of 47 hotels, 63 spas, 75 retail galleries and three golf courses. These facilities and services are offered under four brands — Banyan Tree, Angsana, Cassia and Dhawa.

While Banyan Tree managed to end FY2018 on a positive note, there are indications that the near-term outlook will be tough. For 4QFY2018, it did not record an increase in revenue per available room, unlike in FY2017. RevPAR dropped from $188 in 3QFY2018 to $182 in 4QFY2018; in contrast, it rose from $208 in 3QFY2017 to $222 in 4QFY2017.

For the whole of FY2018, RevPAR was $203, down 5% from $214 in FY2017. While the occupancy rate was 62% for both FY2017 and FY2018, room rates dropped from $345 for FY2017 to $330 for FY2018.

The drag came partly from the company’s properties in Thailand, specifically Phuket, where renovation works took rooms out of available supply. Crucially, the Phuket market was still trying to recover from a boating accident in July 2018 that caused 47 Chinese tourists to drown. With the Chinese no longer flocking to Phuket and one in three tourists to Thailand coming from China historically, this incident has badly affected Thailand’s tourism market. As a result, Banyan Tree’s operating profit from its Thailand business dropped from $18.7 million in FY2017 to $15.3 million in FY2018.

Fee income growth

On the other hand, Banyan Tree’s property sales segment generated earnings growth. It booked an operating profit of $5.5 million in FY2018, nearly double the $2.9 million in FY2017.

During the year, Banyan Tree recognised sales of 128 properties, 11 or 7.9% fewer units than in the previous financial year. However, revenue during the same period was down just 4.4% y-o-y to $192.5 million, owing to the higher value of the properties sold compared with FY2017.

The property sales segment has enjoyed a steady growth momentum. Banyan Tree has received deposits for 211 new units amounting to $125.6 million, representing an 8% increase in unit terms but a 9% decrease in terms of value. The company has unrecognised revenue of $189.9 million from property sales in the pipeline, which is higher than the $166.2 million it had in the preceding financial year. It expects to recognise 40% of this amount progressively in the current financial year (FY2019) and the remaining to be booked over 2020 and 2021.

However, Banyan Tree is signalling caution as the near-term economic outlook is not very favourable. It plans on “redoubling” sales and marketing efforts, and make its pricing “more appealing”.

The company notes that there are signs of a wider slowdown as a result of the ongoing trade war between the US and China. “We will be conservative and will deploy the proceeds from sales to reduce bank borrowings while continuing to generate growth from existing core businesses,” says Ho.

Weaker demand for luxury hotels

This more aggressive approach towards property sales is a result of weaker lower demand for stays in luxury villas and hotels such as Banyan Tree’s. Overall, advanced bookings for Banyan Tree’s rooms and services has taken a hit, coming in 8% lower than the same period last year.

Even so, analysts such as Tara Wong of Phillip Securities are positive on the stock. “Long-term growth catalysts remain intact as the Group transitions into an increasingly asset-light model,” she writes in her March 8 note.

Wong observes that Banyan Tree is gaining traction with its asset-light strategy and is seeing growth in fee income. Between FY2017 and FY2018, the company’s hotel management income grew from $20.5 million to $24.2 million. Last year, Banyan Tree won 28 new management contracts, compared with just three and six in FY2017 and FY2016 respectively.

There is more in the pipeline: Banyan Tree has 53 hotels slated to open between now and 2022. “The securing of such management contracts, especially with strong partners such as Accor and Vanke, will be the main driver for Banyan Tree’s fee-based income,” writes Wong, who has raised her price target from 73 cents to 76 cents.

Banyan Tree shares are up 0.87% year to date, closing at 58 cents on April 3, which values the company at 36.25 times historical earnings. As at Dec 31, 2018, its net asset value was 77 cents, up from 71 cents as at Dec 31, 2017.

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