Banyan Tree Holdings: credit update 16 Aug 19

Banyan Tree Holdings Limited (“Banyan Tree”) is celebrating its 25th anniversary this year and the company has grown in leaps and bounds since its first Banyan Tree resort opening in 1994. By 2023, the company will open its unconventional eco-resort in Mandai that will allow guests to get up close and personal with nature in a biophilic-designed environment. Banyan Tree does not have a large business in Singapore, and the Mandai resort will be the group’s first big foray into its home ground.

Recent corporate developments

As mentioned in our last update, Banyan Tree formed a 50:50 joint venture (“JV”) with China Vanke Co Ltd (“Vanke”) that consolidated its hotels and assets in China. The resulting JV firm — Banyan Tree Assets (China) (“BTAC”) holds a 40% stake in Banyan Tree Service (China) Pte Ltd and Banyan Tree Hotel Management (China) Pte Ltd.

In April 2018, Banyan Tree’s interest in BTAC was diluted to 22.8% from 50% as a result of a capital injection from Vanke. As a result, the company’s investment was reclassified from a JV to an associate on the balance sheet. Pursuant to an announcement on 21 Nov 18, Banyan Tree sold 18.6% shareholding in BTAC to Vanke. The remaining 4.2% ownership in BTAC has since been reclassified as part of long-term investments, with a fair value of S$87.2m at the end of December. On that note, part of the interest in BTAC also included redeemable convertible preference shares (“RCPS”) valued at S$72.1m.

Also in April last year, Banyan Tree increased its equity stake in Laguna Resorts & Hotels Public Company Limited (“LRH”), which brought its aggregate equity interest to 86.3%. In less than a year, the market capitalization of LRH climbed from the point of acquisition to a high of THB11.4 billion, which was close to the all-time high of THB13 billion set in April 2011.

With regard to the Accor S.A. (“Accor”) convertible note mentioned in our previous report, the French hotel chain operator exercised the bond’s conversion rights on 19 Dec 17, and 40m Banyan Tree shares were allocated to Accor at a price of S$0.60 per share. The S$24m convertible debenture was part of the 27 Apr 17 collaboration and subscription agreement between the firms.

On 19 Dec 17, Banyan Tree also issued a call option to Accor that allowed the French group to acquire additional shares of up to 10% of the total issued share capital. That call option had expired and Banyan Tree recognized a profit of S$0.2m after the option lapsed on 19 Jun 18.

Last December, Banyan Tree became part of Accor’s Le Club loyalty program, which allowed over 6.3m Le Club members to earn and redeem points for their stays at Banyan Tree hotels. As a result, management expects revenue from Accor website bookings to double to USD2.8m in 2019.

Liquidity profile

At the end of 2018, liquidity risk disclosures by the group reported total net undiscounted financial liabilities due within a year of S$116.4m, which dropped from a net financial liability of S$72.3m in 2017. The details of the breakdown in financial assets and liabilities are displayed in Table 1. With reference to the table below, liquidity from underlying assets including cash and short-term deposits added up to S$293.2m, falling short of its expected contractual liabilities of S$409.6m by the end of 2019.

Table 1: Company’s liquidity projection — financial assets and liabilities based on timing of repayment

In our view, the company’s liquidity profile deteriorated meaningfully with the repayment of the BTHSP 4.875% 03Jun2019 Corp (SGD) in June. The group’s cash position dropped to S$54m in 2Q19, reaching the lowest level in at least two years. Free cash flows (“FCF”) remained low as trailing-twelve-month (“TTM”) FCF decreased to -S$53.2m at the end of 2Q19, lower than -S$9.2m in 2018 and –S$12.9m in 2017 (see Table 2). Increasing capital expenditures may be fueling the cash burn. In 1Q19, purchases of property, plant and equipment exceeded S$11m, twice the quarterly average between 1Q17 and 4Q18.

Until there is an improvement in cash flows, we suspect Banyan Tree may raise capital by issuing more debt or pledge additional assets as collateral for loans. So far, we estimate that around 50% of investment properties and 63% of property, plant and equipment have been pledged for loans. The level of encumbered assets reached S$592m in the recent quarter, which is equivalent to 39% of total tangible assets. We estimate that the company may still tap on its remaining unencumbered assets to raise additional secured loans of at least S$200m, if needed. Moving forward, we feel that the company’s ability to raise financing cash flows is crucial to its operations.

Credit metrics

The credit profile of Banyan Tree deteriorated during the second quarter of 2019, as our measures of credit quality were meaningfully lower in TTM 2Q19 from TTM 2Q18. Free cash flows and revenues, in particular, declined to new lows of -S$53.2m and S$295m respectively in TTM 2Q19.

Operating margins were also lower. EBITDA and EBITA over revenue dropped to 18.7% and 16.4% respectively. We include EBITA margin as a profitability measure because we think depreciation expense has a meaningful impact on Banyan Tree’s earnings due to its asset-heavy business model. At the same time, the company’s debt-to-EBITDA multiple climbed to a new high of 8.1x in TTM 1Q19 before falling to 7.3x in TTM 2Q19 (2018: 6.6x). This was largely driven by lower operating profit as total debt declined from S$546m in 4Q18 to S$442m in 2Q19.

Earlier this month, LRH, a publicly listed subsidiary of Banyan Tree, announced results for the second quarter ended June. The subsidiary’s results could provide a glimpse of Banyan Tree’s performance as the company operates the Angsana resorts in Phuket and the Banyan Tree hotel in Bangkok. According to the exchange filing, LRH suffered a net loss of THB84m in 2Q19, widening from a loss of THB43m in 2Q18. LRH attributed the dismal results to lower hotel occupancies and decreased revenue recognition of property sales from Cassia Phuket and Laguna Residences.

With respect to its outlook, our 3Q19 revenue forecast for Banyan Tree approximates S$70m, which represents a 35% increase from S$51.8m 2Q19. We do not expect significant improvements in Banyan Tree’s sales for 3Q as demand in the travel industry is typically seasonal. Management also disclosed that hotel forward bookings for 3Q19 were 6% below the same period last year. The group’s historical revenues were usually higher in the first and fourth quarter.

All things considered, the firm’s higher debt leverage, reduced cash flow and low profitability are reasons why we are cutting our credit outlook for Banyan Tree from positive to neutral.

Table 2: Banyan Tree’s financial highlights

Industry and competitors

Our industry analysis adopts a broad assessment of firms operating in the same regions as Banyan Tree. Following the company’s segmentation of countries in its 2018 annual report, our hotel industry estimate stems from twelve listed local and multinational hospitality providers in Southeast Asia and India Oceania. Using compiled information from their exchange filings, we estimate that industry revenue increased from S$46.3 billion in 2015 to S$65.7 billion in 2018 (see Figure 1).

Industry revenue increased with higher tourist arrivals. The number of tourists visiting Southeast Asia (Thailand, Indonesia, Malaysia and Vietnam) grew 28%, while the number of visitors to India Oceania (India and Seychelles) climbed 25% between 2015 and 2018. International tourist arrivals to Vietnam nearly doubled over the same period according to World Bank data, as visitor arrivals were close to 8m in 2015 and estimated to approach 16m in 2018. Bucking the trend of rising industry sales and higher tourist arrivals, Banyan Tree’s revenue dropped 11% to S$329m in the same period (see Figure 1 and 2).

Figure 1: Industry revenue

Figure 2: Tourist arrivals

If, however, we narrow our list of comparables to smaller companies within the Southeast Asian and Indian markets, we find that Banyan Tree’s top-line performance is on par with other small players (see Figure 3). Centara Hotels & Resorts (“Centara”), for instance, witnessed a 15% decline in revenue between 2015 and 2018. Like Banyan Tree, Centara owns and operates hotels in Thailand and the Republic of Maldives. Another five-star hotel operator in Thailand, Dusit Thani Public Company Limited, reported a 2% drop in revenue during the three years.

Figure 3: Peer comparison of revenues

Banyan Tree's 2020 note

Since our last report on the company in September 2017, Banyan Tree paid off three of its senior unsecured notes, leaving BTHSP 4.850% 05Jun2020 Corp (SGD) as the remaining outstanding fixed rate note. The bond’s yield to maturity continued to fall from nearly 5% in September 2017 to its present level of 3.5% on 15 Aug.

With a remaining maturity of less than a year and a credit spread of 203bps, BTHSP 4.850% 05Jun2020 Corp (SGD) looks attractively priced among credits maturing within 0.7 to 1.3 years. As shown in Figure 4, our choice of comparable issuers follows our earlier industry analysis approach, keeping to companies that operate in the same countries as Banyan Tree. Due to a lack of bond issues from smaller players, we think it is fair to compare the BTHSP 4.85% ‘20s against these larger issuers. Our comparison also extends to credits from issuers like Hotel Properties Ltd, and subsidiaries of OUE Realty Pte Ltd due to their exposures to the hospitality space.

The BTHSP 4.850% 05Jun2020 Corp (SGD) is ranked senior unsecured and the terms and conditions of the bond follow that of the S$700m multicurrency debt issuance program dated 28 Oct 14. Financial covenants under the program require that 1) the company’s consolidated tangible net worth is maintained above S$450m; 2) the ratio of consolidated total borrowings to consolidated tangible net worth does not exceed 1.9:1; and 3) the proportion of consolidated secured assets to total tangible assets should not exceed 0.7:1.

So far, there has been no breach of its debt covenants by Banyan Tree and the ratios mentioned above remain in a healthy range. Our estimate of its tangible net worth stood at S$628m in 2Q19, well above the required S$450m. The company’s ratio of total borrowings to consolidated tangible net worth fell to 0.7:1 in 2Q19, below the 1.9:1 limit. Lastly, the ratio of secured assets to total tangible assets was 0.39:1 at the end of June, nearly half of the 0.7:1 threshold.

Figure 4: Bond valuation

Declaration:

For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) has a principal position in BTHSP 4.850% 05Jun2020 Corp (SGD). The analyst who produced this report holds a NIL position in the abovementioned security.