The Erawan Group

The Erawan Group Plc

Event
- We maintain our Outperform rating on ERW but raise our target price to Bt5.20 (from Bt5). We raise our international tourist arrival forecast in 2013-14 given the strong 8M13 number. ERW is one of the biggest beneficiaries of the strong tourist numbers as it is a pure play on hotels (vs. MINT and CENTEL which have contributions from other businesses). Also, ERW’s turnaround story in 2014-15E should support a stock re-rating, in our view.
Impact
- Higher international tourist arrivals forecast. International tourist arrivals for Thailand rose strongly by 21% YoY in 8M13. This was driven mainly by tourist growth from China (+88% YoY) and from Russia (+37% YoY).  Given the strong tourism outlook, we raise our international tourist arrivals growth forecast to 20% and 17% in 2013-14, respectively (from 17% and 15% previously)
- Turnaround story in 2014-15E.  We expect ERW to offer strong EPS growth in 2014-15E. Key drivers are: 1) the earnings recovery from the Hyatt Erawan Hotel (partly closed for renovation in 2012 and 2013); 2) profit contribution from Mercure and IBIS Siam hotels; 3) profit turnaround of Naka Island and 4) additional income from Hop Inn (new budget hotel category).
-  Hotel statistics in July and Aug. ERW guided strong hotel RevPAR at 15% YoY in July to Aug, driven by the occupancy rate rising 10% YoY to 80% and ARR flat YoY. Guidance was for luxury resorts to show the strongest RevPAR growth at 35% YoY, followed by 27% for the economy segment, 13% for midscale and 10% for luxury Bangkok.
Earnings and target price revision
- We cut 2013-14E EPS by 14-16% due to higher tax expense (as tax loss carry forwards were fully utilized against capital gains from the sale of two hotels to ERW’s property fund.). But we raise our 2015E EPS by 6% and 13% in 2016E to reflect additional income from Hop Inn, opened in 2014. We raise our TP to Bt5.2 (from Bt5) on an earnings revisions and the rollover of our valuation to end 2014E.
Price catalyst
- 12-month price target: Bt5.20 based on a DCF methodology.
- Catalyst: International tourist numbers and high season in Q4
Action and recommendation
- We like ERW as it is more geared to economy and midscale hotels, which are facing relatively lower supply additions. ERW is trading at an attractive 0.7x EV/EBITDA over EBITDA growth in 2013-14E, lower than the regional peer average of 0.9x. Maintain OP rating.