2Q14F: After this, it will leave the worst behind. We believe earnings hit bottom in 2Q14F, with most recent operational statistics for both hotel and food suggesting improvement. Though we did revise our 2014F to factor in the expected weak 2Q14F, our new forecast suggests a stronger earnings outlook in 2H14 (43% vs. 57% in our full-year forecast). We continue to expect strong earnings growth in 2015 on the strength of a recovery in Thai tourism after an interim government is in place (August-September) and an improving economy. In the near term, share price will be hit by the weak 2Q14F and subsequent earnings downgrades but we see this as an opportunity to accumulate ahead of the recovery in 2H14-2015. We still BUY with TP at Bt42/share.
2Q14F: The year’s bottom. We expect 2Q14F net profit at Bt57mn, down from Bt189mn in 2Q13 and Bt502mn in 1Q14. The food business was poorer than expected and thus it will not meet our July earnings estimate of Bt180mn. For the food business (50% of revenues), we expect 2Q14 same-store sales (SSS) growth of 0.3%, down from 2.2% in 2Q13 but up from -1.8% in 1Q14. This is below our previous estimate of 1.0% mainly due to a low SSS growth at Auntie Anne’s caused by a delay in the introduction of new products. For the hotel business (50% of revenues), we expect RevPar to grow 1% YoY but fall 37% QoQ. RevPar growth YoY is off a higher ARR (+10% YoY but -31% QoQ) from hotels in Maldives offsetting the lower occupancy at 69% in 2Q14 (from 75% in 2Q13 and 75% in 1Q14), largely from weakness at its Bangkok hotels.
Operations improving. CENTEL says hotel operations are improving, with occupancy rising to 73% in July; forward bookings are also climbing. Hotels in Bangkok (32% of hotel revenues), the chief drag on earnings, are doing better, with occupancy in July at ~55% vs. 49% in 1H14. With a calmer political situation, events are coming back, mainly local, and CENTEL expects revenue from food at hotels and events to be better in 2H14. It expects hotel operations to continue to improve backed by a recovery in Thai tourism after the seating of an interim government, fostered by greater travel confidence. For its food business, CENTEL is working on the problem of slow addition of new products for Auntie Anne’s. With the economy coming back, CENTEL guides to continued positive SSS growth in July. The exemption of visa fees for Chinese and Taiwanese tourists was supposed to have begun on August 1, but has been delayed. We do not expect much impact from this, as though Chinese tourists account for 9% of total guests, they are from the higher end and mainly stay in hotels at the Maldives.
Expansion. CENTEL will open two of its economy hotel brand “COSI” in 2016, in Samui and Pattaya, and plans to leverage the COSI brand for hotel management in the future. CENTEL is considering investing in its own five-star hotel at Cha-am, which would open in 2018. For its food business, it is looking for the acquisition of an international food brand in 2015, though is also open to a JV, and plans to expand outlets overseas with shopping malls.
Cut 2014 but this changes 2015 insignificantly, implying strong recovery. We revised down our 2014 core earnings forecast to Bt1.3bn from Bt1.6bn (down 17%), mainly on a reduction in our SSS projection to flat this year from 2.0%. Our 2014F suggests stronger earnings in 2H14. This changes our 2015-16 forecasts very little, implying a strong recovery after the sad 2014.