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The Erawan Group

Weak 1Q14 numbers expected; low season losses ahead

The Erawan Group Plc (ERW)

Investment thesis

Although ERW trades at below its replacement value of Bt6.86/share, there aren't any obvious short-term share price catalysts. We have three concerns—consensus earnings forecast cut risk (our FY14 projection is 39% below the street), poor 1Q14 high season numbers and losses in 2Q-3Q14. Despite our diminished FY14-15 earnings forecasts, we have revised up our YE14 target price to Bt4.20 from Bt3.80, as we have added 10 new HOP INN hotels to our model—an unchanged 40% discount to DCF value (9.7% WACC and a 2% terminal growth rate).

Earnings forecasts cut

We have cut our net profit forecasts by 50percent for FY14 and by 20percent for FY15. Our FY14 RevPar projection is for a fall of 18% YoY (we previously expected 6percent slippage)—a 67% occupancy rate (79percent for FY13) and a 5% room rate contraction. We have cut our revenue forecasts by 7percent for FY14 and by 5percent for FY15 and slashed our margin assumptions from 3.1% to 1.7percent for FY14 and from 3.2% to 2.7percent for FY15. FY14 core profit is expected to dive 39%. The 13 new hotels to launch this year are expected to double FY15 earnings. Hotel expansion will push up the net gearing ratio to 1.5-1.6x at YE14 from 1.2x at YE13.

The worst 1Q14 high season since the airport closure in 4Q08

ERW is expected to post a core profit of only Bt13m for 1Q14, down by 91% YoY and by 78% QoQ. The firm will report a 22% YoY RevPar plunge (occupancy of 65% in 1Q14 against 85% in 1Q13)—drops of 45percent for five-star Bangkok properties, 20percent for mid-range hotels and 4percent for the economy segment. The only expected growth is 13percent for luxury resorts (Phuket and Samui). Hotel revenue will post a 25% YoY dive.

To post red ink for 2Q14 and 3Q14

Core operational losses in 2Q-3Q14 (deeper YoY core losses) will be mainly due to low season and pre-operating expenses for 13 new hotels this year (Bt56m for FY14 against none for FY13). Bookings have been slow to recover since the State of Emergency in Bangkok was lifted on March 19. Note that ERW posted a record bottom-line for 2Q13, due to an Bt864m gain from asset sales to ERWPF.

To open 13 new hotels this year

ERW will open an extension to the Holiday Inn Pattaya (200 rooms) in 3Q14, the Mercure Pattaya (210) in 4Q14, the Ibis Krabi (206) in 4Q14 and 10 HOP INNs (790; a proprietary budget hotel brand), 2Q-4Q14, in Mukdaharn, Nongkhai, Kanchanaburi, Udonthani, Ubon Ratchathani, Tak, Nakorn Ratchasima, Lampang, Sakaew and Khonkaen. At YE14, ERW will have 29 hotels (16 at YE13) and 5,290 rooms (up 36%). The firm plans to have 25 HOP INN hotels in Thailand and five in other ASEAN countries by YE15. We like the geographical revenue diversification, particularly for expanding HOP INN. But, the impact on FY14 revenue will be slight (10 HOP INN hotels will contribute only 1% of the FY14 top-line).

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