The Erawan Group

The Erawan Group Plc (ERW)

- Brighter climate overall suggests 2Q14F is bottom, recovering strongly in 4Q14 and into 2015
- The worst is over. Share price should be supported by V-shaped earnings recovery. Maintain   BUY with TP at Bt5.7/share

Hit bottom in 2Q14, back strongly in 4Q14-2015. We now believe core 2Q14 profit
will be weaker than we had thought in mid-May, hit in June by the declaration of
martial law on May 20, followed by a coup and curfew on May 22. While we see
downside to our 2014 forecast due to the weak 2Q14F, we continue to expect strong
earnings growth in 2015 as tourism recovers with the return to political calm. On a
quarterly basis, we believe the worst is over, with earnings expected to hit bottom in
2Q14, turn back up in 3Q14, head into a strong recovery in 4Q14 and then a solid return
to its uptrend in 2015. YTD, ERW’s share price has increased by 47% vs. 19% for the SET.
However, we do not feel valuation is demanding, as ERW’s share price is trading at 11x
15EV/EBITDA, below its long-term average of 13x. ERW is our top pick in the tourism
sector. We maintain BUY on ERW with TP at Bt5.7/share.
2Q14F: Core loss of Bt127mn, a bigger core loss than the Bt74mn in 2Q13 and down
from core profit of Bt2mn in 1Q14. This is worse than our earlier estimate in mid-May
mainly because of a lower occupancy rate. We estimate occupancy rate at 61% in 2Q14,
down from 76% in 2Q13 and 65% in 1Q14, below our previous estimate of 70% as June
was hit by martial law and subsequent international travel alerts. We expect Bt47mn
net extra gains from: 1) Bt38mn gain on provision reversal, plus 2) Bt12mn gain on sale
of five shophouses near HOP INN Mukdahan and 3) Bt3mn pre-opening expenses for its
new hotels. All told, we estimate a 2Q14 net loss of Bt80mn vs. Bt3mn net profit in
1Q14. The YoY is not really comparable given the Bt731mn net profit in 2Q13 which had
a Bt805mn gain on asset divestment into a property fund, ERWPF.
Strong recovery in 4Q14-2015. ERW is poised to get back into the action as its
Bangkok hotels, which provide more than half its revenues, recover. In June, occupancy
rate at hotels in Bangkok was slashed to 46% from ~60% in April-May and 50% in 1Q14
because of the political noise but July showed improvement after calm was restored,
with occupancy rising to 55% in Bangkok hotels, aided by the reduction of international
travel alerts. Based on forward bookings and the overall brighter outlook for Thai
tourism from upcoming stimulus such as the exemption of visa fee for Chinese tourists
(9% of ERW’s room revenues), ERW expects occupancy rate at hotels in Bangkok to rise
to 62% in 3Q14 and jump to 77% in 4Q14.
Expansion on track. ERW will open an extension of Holiday Inn Pattaya on August 1
and three HOP INNs in 3Q14. In 4Q14, it plans to open Mercure Pattaya and Ibis Krabi. By
the end of 2014, ERW will have 36 hotels and 5,290 rooms (+36%). For 2015, ERW’s plan
is to focus on HOP INN, opening 15 more (from 10 in 2014). ERW is considering setting
up a REIT and expects concrete progress in 1H15.