The Erawan Group

The Erawan Group  Plc (ERW)

Core loss, as expected
ERW posted a core operational loss of Bt6m for 3Q13, a big improvement from the core losses of Bt55m for 3Q12 and Bt74m for 2Q13. The result was in line with our estimate and the consensus. Note that ERW reported a record net profit of Bt732m for 2Q13, due to a Bt864m gain from asset sales (Ibis Patong and Pattaya) to the ERWPF property fund.
Results highlights
The sharply reduced 3Q13 loss was led by hotel revenue growth, fatter GM and a lower SG&A/sales ratio. In YoY terms, hotel income rose 17% to Bt1bn in 3Q13—up by 6% for the Bangkok luxury segment, by 31% for the luxury resort segment, by 35% for the tourist segment and by 33% for the budget. Segment. GM fattened 1.1% YoY to 47.8%. The SG&A/sales ratio dropped 0.7% YoY, due to revenue expansion.
In QoQ terms, the operational improvement was driven by 6% hotel revenue growth (high season for the JW Marriott Bangkok) and fatter margins. GM rose from 46.0% in 2Q13 to 47.8% and the SG&A/sales ratio declined from 28.4% to 27.0%. The net gearing ratio was stable at 1.5x at end-Sept.
Outlook
The bottom-line will turn around QoQ and expand YoY in 4Q13 (a Bt56m core profit was posted for 4Q12). Revenue and margin will both rise. The Grand Hyatt Erawan will resume full operations in 4Q13 (40% of its rooms were closed for renovation in 2Q-3Q13).  
What’s changed? 
9M13 net profit represents 85% of our forecast (88% of the street number), which we maintain unchanged. We will revisit our model if the Nov-Dec performances of the hotels miss expectations as a result of political conflict.
The next asset sale is expected in mid 2014. It would mean upside to our FY14 net profit forecast. Besides, there is scope for long-term earnings upside from the new budget hotel brand, HOP INN (to launch in 2H14), which we have yet to factor into our projection.
Recommendation
Among our tourism coverage, political conflict is currently the biggest risk. ERW stands to be the most negatively impacted of the three stocks we follow, as it has the greatest proportion of its revenue concentrated in Bangkok (70% of its top-line). However, we maintain a long-term BUY rating with an unchanged YE14 target price of Bt7, a 15% discount to DCF value. ERW trades far below its replacement value of Bt6.3/share. The HOP INN hotels would add 1% to our FY14 revenue forecast and 2% to our FY15 projection. For FY15, we preliminarily assume that HOP INN would add 4% to our EBITDA forecast and 5% to our core profit estimate.