The Erawan Group

No surprise at red ink 

ERW posted a core loss of Bt91m for 3Q14 (core losses of 6m for 3Q13 and Bt133m for 2Q14). The net loss was Bt83m, due to an Bt8m gain from the sale of shophouses in Mukdaharn Province. The 3Q14 core loss was a bit deeper than our estimate of Bt85m (the street number was Bt72m). 

Results highlights 

Hotel revenue fell 9% YoY to Bt960m, GM declined from 50.2% in 3Q13 to 44.9% in 3Q14 and the SG&A/sales ratio rose 1% YoY to 28.8%. Gross profit did not cover SG&A expenses. System-wide hotel RevPar dropped 17.4% YoY (occupancy slumped 15.4% YoY to 62%; the mean room rate rose 1.9% YoY). Hotel RevPar dived by 4.7% YoY for luxury hotels in Bangkok, by 9.6% for ex-Bangkok luxury resorts, by 18% for mid range brands and by 14.7% for economy hotels. The shallower QoQ loss was due to 15% hotel revenue expansion, a 3.4% fatter GM and a 1.4% lower SG&A/sales ratio. The net gearing ratio inched up from 1.7x at end-June to 1.8x at end-Sept. 

Outlook 

The bottom-line will turnaround QoQ to black ink in 4Q14 on seasonality, but it will fall in YoY terms, due to depreciation expenses and pre-operating expenses for new hotels (Mercure Pattaya and Ibis Krabi) versus no pre-operating expenses in 4Q13. The 4Q14 bottom-line turnaround will be driven by a Bangkok hotel recovery. ERW suggests a mean occupancy rate bounce from 62% in 3Q14 to 70% in 4Q14. Excluding HOP INN, the firm expects an occupancy rate of 77% in 4Q14 against 78% in 4Q13. Revenue is guided to rise 9% YoY following declines of 24% YoY in 1Q14, 16% YoY in 2Q14 and 8% in 3Q14.  

What’s changed? 

We forecast a core loss of Bt169m for FY14 and a core profit of Bt148m for FY15 (in line with the profit for FY13, a normal year for tourism). However, there is downside risk to the consensus model. Note that our FY15 core profit forecast is Bt148m, which is 51% below the street number of Bt304m.  

Recommendation 

The FY14 core loss is priced in. ERW trades at a 38% discount to its replacement value of Bt7.20/share. We look ahead to a turnaround in FY15. The firm targets FY15 growth of 35% in hotel revenue and 15% in RevPar, driven by the occupancy rate. Next year there will be big gains from asset sales to a newly-established REIT. Our BUY rating stands with a DCF-derived YE15 target price of Bt6, pegged to a 20% discount to DCF value (9.5% WACC and a 2% terminal growth rate).