The Erawan Group
Preview 2Q15: Final quarter for red ink!
The Erawan Group Plc (ERW)
Over the past six months, ERW’s share price has fallen by 10% vs. +17% for CENTEL and +6% for MINT, likely a reflection of investor expectations of the usual low season loss. However, given the strong influx of tourist arrivals, we believe losses in 2Q15 will be small and mark the end of losses, with profit in 3Q15. In response to guidance to lower ARR growth, we have cut our 2015 core profit forecast by 21% and 2016 by 10%. Though this cuts TP to Bt6.2/share from Bt7/share, we still believe in the good prospects for this firm and Buy.
Strong arrivals = high occupancy rate. Based on AOT statistics, Thai tourism is continuing to strengthen with international passenger growth of ~30% YoY in 2Q15, which should raise occupancy rate for ERW. Excluding the budget hotel segment (HOP INN), which distorts ERW’s figures because of its small contribution, ERW guides to an average occupancy rate of ~73% in 2Q15, far better than the 61% in 2Q14. This comes mostly from its luxury segment in Bangkok (53% of revenue in 1Q15) where occupancy rate jumped to ~78% (from 50% in 2Q14) and midscale segment (23% of revenue in 1Q15), where occupancy rate surged to ~79% (vs. 58% in 2Q14).
ARR growth lower than expected. Excluding HOP INN, ERW reports an increase in average room rate (ARR) in 2Q15 of ~1% YoY (vs. +3% YoY in 1Q15) bringing ARR growth in 1H15 to ~2% YoY, missing our 2015 assumption of 5% ARR growth YoY. Looking at ARR by hotel segment reveals that the luxury Bangkok segment is the primary cause for the weaker ARR. Room rates in this segment were flat YoY in 1H15, which we believe reflects the decline in high-yield Russians since the huge growth in Chinese tourists boosts occupancy rate rather than ARR.
Earnings cut. We revise down ERW’s core earnings by 21% in 2015 and 10% in 2016 to incorporate our lower ARR growth (excluding HOP INN) assumption of 2% YoY in 2015 (from 5%) and 5% YoY in 2016 (from 6%). We now estimate core earnings of Bt300mn in 2015, up from a loss of Bt154mn in 2014.
