Erawan Group

Erawan Group Plc (ERW) 

 

ERW’s analyst meeting last Friday left us positive on its outlook for 4Q15 and 2016. We see catalysts in the form of: 1) management’s plan to announce a 5-year strategy in Jan 2016; and 2) the expected announcement of hotel sales to a REIT next year, along with its laggard performance against peers to drive ERW’s share price higher in the near term. The stock now offers 11% upside to our target price. We reiterate our Outperform rating for ERW with a TP of Bt4.70. 

Investment highlights 

- Improved outlook for Hyatt Erawan. The Hyatt Erawan’s occupancy rate for 4Q15 QTD is 68%, up from a low of 40% in late August in the aftermath of that month’s bombing of the Erawan Shrine. ERW expects the hotel’s occupancy rate to exceed 70% in 4Q15, assuming high rates in November and December. Group meetings postponed from August and September should boost both room revenue and occupancy rates in the quarter.  

- Management’s targets for 4Q15 and 2015.

Management expects hotel RevPar +4% YoY in 4Q15 and +8% YoY in 2015 (occupancy rate up 5% YoY to 75% and 

ARR down 7% YoY), in line with our forecast. The company will add 4 more Hop Inn hotels in 4Q15, which would take the total number to 15 Hop Inn in 2015. We estimate net profit will reach Bt139mn in 2015, a turnaround from a loss of Bt112mn in 2014.  

- Net profit increase of 98% YoY in 2016E. A strong recovery next year by the Hyatt Erawan from the August bombing will be the key driver for ERW in 2016E (the hotel accounts for 40-50% of ERW’s estimated 2016 revenue.) Overall, we expect RevPar growth of 5% YoY (total occupancy rate up 2% YoY to 80% and ARR up 2% YoY) in 2016E.  

- 5-year plan to be unveiled in Jan 2016. We expect the new 5-year plan to be a positive catalyst for ERW, bringing fresh details about plans for new hotels and REIT management. So far, the company plans to add 10 Hop Inn hotels in Thailand and one in the Philippines in 2016. 

- REIT in 2016. ERW plans to sell 1-2 hotels to a REIT in mid-2016. We have no details on which property or properties will be sold, but any extra gain from hotel sales could result in higher dividend payment to shareholders. Assuming a total extra gain from the sale of two assets of Bt800mn (in line with a 2013 gain from the sale of the IBIS Patong and IBIS Pattaya hotels) we expect 2016 DPS will increase to Bt0.19 (from Bt0.05 currently), implying an increase in dividend yield to 5% from 1.2% in 2016E. Note that we have not included this potential gain in our model yet. 

Valuation 

- ERW’s share price is down 8% YTD (vs. CENTEL +47% and MINT +16% and SET 

-7%), despite the earnings turnaround in 2015E from a net loss in 2014. We view ERW as mispriced due to the market’s concern over the impact of the August bombing in Bangkok. ERW is currently undervalued at 11% below our current target price of Bt4.7 (DCF valuation) and 12% below our replacement cost valuation (see Figs 1 & 2). With a positive catalyst from the improved 2016 outlook and positive dividend upside from the expected sale of hotels to a REIT, we reiterate our Outperform rating for ERW.