The Erawan Group

The Erawan Group Plc (ERW)

4Q13F preview. We expect 4Q13 net profit at Bt72mn, up 22% YoY and improving from a net loss of Bt6mn in 3Q13. We maintain our forecast of 2013 core profit of Bt140mn (+94% YoY) and net profit of Bt945mn, on extra gain from sale of assets to ERWPF.
Likely to miss seasonal high in 1Q14. A full 96% of ERW’s revenues come from hotels and more than half of that from hotels in Bangkok. ERW can thus not avoid the damage to operations caused by the political tension. Over January 1-21, revenues per available room (RevPar) slid 4% YoY mainly due to a drop in occupancy rate to 69% from 80%, while average room rate (ARR) increased 8% YoY. The fall in RevPar came primarily from its hotels in Bangkok where it dropped 16% YoY.
Operations stronger than past political deadlock. Though there is concern about the effect of the political problems, ERW does not expect operations to be as severely impacted this time as in the past (2008-10). First, Grand Hyatt Erawan Bangkok hotel (GHEB), its flagship in Bangkok and accounting for 25% of total revenues, is running at an occupancy rate of 45%. Though admittedly low for the high season, it is better than the ~20% in April-May 2010 when the red shirts shut down the Ratchaprasong area and ERW closed GHEB for around four weeks. Second, aside from the local politics, the global economic crisis hurt Thailand’s tourism industry in 2009-10 – and global economies are looking better in 2014. Finally, ERW’s earnings profile is stronger than in 2008-10, when it was facing an unfavorable climate concurrent with the opening of eight hotels with more than 2,000 rooms. Regarding historical experiences, ERW’s operation in terms of occupancy rate took 2-3 months to recover to pre-crisis level.
2014 guidance. For 2014, ERW expects flat occupancy rate at 79% with an 8% increase in ARR, expecting a better political situation in 2Q14. ERW still plans to open new hotels in 2014: 1) 10 HOP INN hotels (790 rooms during 2Q-4Q14), 2) Holiday Inn Pattaya (an extension adding 200 rooms in August), 3) Mercure Pattaya (210 rooms in 4Q14) and 4) Ibis Krabi (206 rooms in 4Q14). All told, by the end of 2014, ERW will have 36 hotels and 5,290 rooms (+36%).
Revise 2014-15 earnings. To factor in the impact from the political turmoil and initial losses from newly opened hotels, we cut ERW’s core earnings by 59% in 2014 and 17% in 2015. After the revision, we estimate a fall of 29% in core earnings in 2014 with a view of weak 1H14 and stronger outlook in 2H14. We expect a strong recovery in 2015 from higher revenues and EBITDA margin on operating leverage. Our 2014 earnings projection has not factored in gain on asset divestment to property fund.
Negatives priced in. Waiting for catalysts. Our new 2014 TP is Bt5/share based on 13.5x EV/EBITDA (down from Bt6.75, based on 15x EV/EBITDA). Since the political upheaval started in November 2013, ERW’s share price has fallen 31% vs. 31% for CENTEL, 22% for MINT and 11% for the SET. ERW is trading at 1.8x 2014 PB, its historical average, and we do not believe it is necessary to assign a tough valuation as in 2009-10 (at -0.5SD of historical average) because operations are now stronger. While there are no near term positive catalysts, however, our BUY rating stands for longer-term investment since the sharp drop in share price implies the negatives are priced in and the low valuation readies ERW to be re-rated when politics calms down.