Banyan Tree @ 1.38 ( Hotels / Singapore ) 1 comments
Final Poll Results: 5:6
(P.S: Sorry for any disturbances the advertisements above may have caused you)
1. Turmoil in core market
2. Expensive valuation: Expected FY06 PE of 30-35X
3. As much a property play as a hotel play: double risk
Anyone who is bearish on Thailand should not be in Banyan Tree. And I am one of them.
I had previously considered writing about Banyan Tree but had decided against it because of the secular trend of Asian tourism on the rise and the fact that Banyan Tree is a well-established hotel brand in a niche tourism market (resorts and spas). But it is difficult to cast it as a buy given Banyan Tree's strong tourism, and less obviously, property, exposure to a country that has become a rather uncertain political mess recently; therefore it is a hotstocknot.
I am talking, of course, about Thailand. There is no need to elaborate further on the financial and political developments that have shaken the country lately but suffice to say that it has become rather volatile. If one thinks the Thai market is likely to remain in the doldrums for the next year or so, is it wise to buy a company exposed heavily to the Thai tourism industry? Consider both market valuation and fundamental/business effects. The market of a country in turmoil will be de-rated to a lower multiple; add to that the likely stagnation in earnings that form the fundamentals (for Banyan Tree, bear in mind that tourism expenditure is highly discretionary expenditure). The impact on stock price is therefore, double-layered --- PE drop on top of earnings growth drop.
What is the degree of exposure of Banyan Tree to Thailand? According to its mid-2006 prospectus, as of March 2006, out of the 1986 rooms available in its Banyan Tree/Angsana/Colours of Angsana/co-owned hotels/resorts, 1040 of them, or >50%, are located in Thailand (mainly Phuket). About 80% of its revenue is derived from assets in Southeast Asia; no prizes for guessing which country in Southeast Asia is the main contributor. Consider also, that in FY05, when the tsunami hit Southeast Asia (and the Maldives as well), the group's bottomline nearly went into the red, with net profit collapsing to S$1M from S$30M in FY04.
The momentum of expansion for Banyan Tree post-IPO seems to be swinging to Northeast Asia (Japan, via tie-ups with Okura, and in China) and the Middle-East (opening of new hotels/resorts), and yet in the absence of track record Thailand remains its core centre of operations. The lack of price correction in the stock following all the recent negative developments in this core market just accentuates the headwind against the stock (stock price was supported by buying in of Capital Group).
Consider the valuation aspect. If we accept management's projection that FY06 full-year results (coming up in February) will be better than FY04's S$30M, then FY06 PE will be in the region of 30-35X. That is an expensive valuation in itself, but consider further: much of the profit will be due to contributions from the property sales segment which are expected to be >S$10M in 4Q06, which is why management is confident of posting improved net profit over FY04 despite only reaching S$19M net profit over 9M06. Indeed, property sales has made up half the EBITDA (which can be loosely interpreted as operating cashflow) over 9M06 with hotels investment/management contributing the other half. If I am cynical, I can see property sales as low-quality earnings because asset disposals are typically of a non-recurring nature. Given that Banyan Tree seems to see this as a core part of its operations, one may still note that given that a large portion of these sales are villas in Phuket, the future outlook for new property sales may be pessimistic given the uncertainty in Thailand.
All bets are off if some private equity group flush with liquidity decides that the group is a good acquisition to get exposure to emerging market tourism in the Asia-Pacific, on top of a recognised brand-name; my feel, however, is that the risk of business underperformance far outweighs such an upside possibility.
I agree that Banyan Tree is a hot-stock-not: Agree/Disagree