The Erawan Group

The Erawan Group Plc (ERW) 

 

In 1Q13, ERW enjoyed a sharp rebound in share price, boosted by record high earnings that quarter after earnings returned to the black in 2012 from red ink since 2009. 2016 is looking much the same: another record high for earnings expected in 1Q16 plus a new earnings driver - profit in low season – as seasonality fades. ERW is trading at 2.1x 2016PB, its historical average but below the 3.0x in 1Q13, implying the market is ignoring the positives. We BUY and select it as the sector’s top pick. 

 

A drag returns to a driver, record high in 1Q16. A talk with management revealed that ERW is enjoying stronger operations, particularly at its flagship Grand Hyatt Erawan Bangkok Hotel (GHEB, ~30% of revenue) – which is showing improvement after last August’s bomb. Occupancy at GHEB got back to a high 84% in January–February, relatively flat YoY - after showing YoY contractions since 3Q15. Another positive is a good average room rate (ARR) increase of 5% YoY. Excluding budget hotels (HOP INN), in January-February, revenue per available room (RevPar) grew 5% thanks to a strong average occupancy rate of 89% (vs. 83% same period last year). We expect 1Q16 to bring record high core profit of Bt170mn, up 23% YoY and 63% QoQ, and well above the Bt148mn in its prior historical best in 1Q13. 

 

Stronger low season operations. The seasonality of Thai tourism is fading with hefty growth in arrivals even in the low season, largely from short-haul markets such as China, for which seasonality is less of a factor. ERW is doing well off this structural change with a stronger occupancy rate leading to RevPaR growth and, importantly, a stronger growth in low season: ERW’s RevPar for 2Q and 3Q in 2012-15 increased at a rate of 3-4% CAGR vs. 0-3% CAGR for 1Q and 4Q. Going forward, when occupancy rate is high and there is a ~15% ARR gap between high and low season, we believe ARR - the secondary driver for RevPar growth and at no additional cost – will be able to increase, even in the low season. We expect 2016 to be the first year in which ERW can report a profit in the 2Q-3Q low season, breaking the traditional pattern of losses. A stronger low season translates to better operations overall. 

 

Positive environment but valuation is discounted. ERW’s positives have shown up to play – but we do not believe the market has noticed. In 1Q13, ERW’s share price was spurred up by the 2012 earnings turnaround after bleeding red ink since 2009, and it had record high earnings in 1Q13. Things are looking very similar in 1Q16: earnings are expected to be a new high in 1Q16 and there is a new earnings driver, i.e. low season profit as seasonality for Thai tourism fades. Seemingly ignoring these positives, ERW is trading at 2.1x 2016PB, which is its historical average, but below the 3.0x seen in 1Q13.  

 

Top buy in tourism sector. ERW merits being our top buy in its sector because it benefits most from the robust Thai tourism and fading seasonality. Of hoteliers, we expect ERW to report the strongest core earnings growth at 70% YoY to Bt337mn in 2016. We rate BUY with end-2016 TP at Bt6.5/share.