Erawan Group

Erawan Group

 

It is a fact that Monday’s bomb at the Erawan Shrine will hurt flagship Grand Hyatt Erawan and delay the switch to profit in the low season. At the same time, we expect the impact will be short-lived, with earnings recovery from 4Q15. Share price has fallen 9% since Monday, implying negatives are priced in. In our view, the release of the weak 3Q15 will offer investors a good entry point to get in on the better earnings ahead. We maintain BUY with new TP of Bt6.5/share (up from Bt6.2/share) as we roll over to mid-2016 (from end-2015). 

Grand Hyatt Erawan hurt but other hotels doing well. At the analyst meeting, ERW said that Grand Hyatt Erawan, its flagship bringing in ~30% of revenue, did suffer some small damage in its commercial area (for which it can file an insurance claim) but no damage at the actual hotel area and guest rooms. Thus far there have not been a large number of room cancellations, but there have been some postponements of events and meetings. Other hotels in Bangkok (~35-40% of revenues) are operating normally. In fact, things are picking up for hotels in the provinces (30-35% of revenues), as advance bookings by Russians for 4Q15 are picking up. ERW expects operations at Grand Hyatt Erawan to take 1.5 to 2 months to get back to normal, similar to after the New Year’s Eve bomb in 2006 in the same Ratchaprasong area. 

ERW lowers 2015 target. ERW has revised its 2015 revenue growth target to 28% YoY from 35% YoY. Excluding the budget hotel HOP INN, ERW expects revenue per available room (RevPar) growth of 17% YoY (down from +21% YoY) backed by occupancy rate of 78% (+11% from 2014) and average room rate growth of 1% YoY 

Earnings revision. In response to the company’s downward revision, we also lower our core earnings forecast by 19% for 2015 and by 7% for 2016. The bomb is delaying the switch to profit in the 3Q low season from the traditional loss and we now anticipate a small loss in 3Q15, similar to 2Q15. Recovery will come in 4Q15, which will be this year’s best quarter, followed by a better earnings picture for 2016.  

Maintain BUY. Good entry point is after the weak 3Q15 results. Since Monday, ERW’s share price has declined by 9% and it is trading at 1.9x 15PB, its historical average. We believe share price has factored in the negatives and do not expect a deep valuation discount to below historical average as the situation appears to be contained and the government is working to restore tourist confidence. We expect the damage to be short-lived particularly since Thai tourism has proven over the years to be able to remain on a secular growth trend despite turmoil. We see the release of weak 3Q15 performance as a good entry point for ERW to get in on the better earnings ahead. We maintain BUY with a new TP of Bt6.5/share (up from Bt6.2/share) as we roll over to mid-2016 (from end-2015) based on 15x