SINGAPORE (Sept 12): UOB Kay Hian is initiating coverage on hospitality giant Banyan Tree Holdings with a “buy” call and a target price of 93 cents, on the back of global tourism growth and economic recovery.
“We believe Banyan Tree’s turnaround story is firmly in place,” says lead analyst Edison Chen in a retail report on Tuesday.
The research house likes Banyan Tree for its solid market positioning as the leader in luxury resort experience, focus on asset-light approach in hotel management services and brand management, and new revenue channels through synergistic partnerships with key industry players.
In addition, the group could benefit from the potential full divestment of its China assets.
Chen values Banyan Tree at $707.6 million, based on 0.6x of the cap value for its hotel and property development businesses as well as 12.9x 2018F EV/EBITDA for its hotel management services, which is a 10% discount to its peers’ average.
Chen also sees significant hidden value in the group’s property assets. “Given the deep discount, we believe now is an opportunity for investors to go in at prices slightly above strategic partners’,” he says.
The group’s fee income is also expected to increase through its partnership with Accor and joint venture deal with Vanke, which will help Banyan Tree enter international capital cities via their networks.
“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,” Chen says.
With the group's expertise in brand management, the Accor deal will see Banyan Tree focusing on its higher-margin brand management and leaving day-to-day operations to Accor. This will also allow the consolidating operations to a central office with minimum overheads, while incurring lower commissions through Accor’s network.
Internally, Banyan Tree will also be rationalising its operations and implementing cost-cutting measures to increase productivity.
“As such, we expect EBITDA margins to improve from 7.1% in 2016 to 15.0% in 2019,” Chen says.
“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 $255.9 million in 2019 from $507.8 million in 2016,” he adds. “Similarly, financing costs are expected to drop to $17.8 million in 2019 from $29.6 million in 2016 while further asset-light growth can be achieved through the Accor partnership.”
In addition, Chen believes there is significant hidden book value for Banyan Tree’s landbank and property assets, which were recorded at historical cost and have since seen 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,” Chen says.
Chen forecasts Banyan Tree’s EBITDA at grow at a compound annual growth rate of 35.4%, excluding lumpy disposal gains, from $22.0 million in 2016 to $54.7 million in 2019.
As at 1.23pm, shares in BT are trading 2.5 cents higher at 66.5 cents, implying a 39.8% upside to UOB’s target price. It is trading at 26.5 times FY2017 forward earnings of with a dividend yield of 1.7%.
Year to date, shares in Banyan Tree have climbed 38.5%.
