The Erawan Group

The Erawan Group Plc (ERW) 

 

We maintain our BUY call on ERW with TP of Bt6.5/share. Management says operations are better in 4Q15, recovering from the August bomb. It plans to add 11 HOP INN budget hotels in 2016 but they are small and thus will not drag earnings down materially. We view ERW as an attractive laggard play since, over the past three months, its share price has increased 16%, far behind 32% for CENTEL and 35% for MINT. 

 

Improving hotel operations. At the analyst meeting on Friday, ERW reports that operations at its flagship Grand Hyatt Erawan Bangkok Hotel (~30% of revenue) are better after the August 17 bomb at Erawan Shrine. QTD, Grand Hyatt Erawan Bangkok Hotel is running at ~70% occupancy rate, slightly below the same period last year but better than the low ~60% in 3Q15, hit by the bomb. Momentum is expected to continue to strengthen over the remainder of the year as Thailand continues in its tourism high season and events and meetings that had been postponed take place.  

 

2016 target. ERW is looking positively at 2016. Excluding HOP INN budget hotels, which distort figures because of the small contribution, ERW expects a 9% YoY increase in revenue per available room (RevPar), lifted by a rise in occupancy to 83% (from 78% in 2015) and a 3% increase in average room rate (ARR). 

 

Budget hotel expansion. ERW is focusing its expansion on its HOP INN budget hotels (~2% of revenue). Currently, it has eleven HOP INN hotels, with a 55% occupancy rate; we believe operations are already profitable at the EBITDA level. ERW plans to open four HOP INN hotels in 4Q15 (Nakorn Sri Thammarat, Trang, Surat Thani and Krabi) and 11 in 2016 (10 in Thailand and one in the Philippines in Dec 2016). Despite the rapid HOP INN expansion, we do not expect a significant earnings drag in 2016 since investment per HOP INN hotel is small at ~Bt60mn in Thailand and ~Bt200mn in Philippines. ERW expects to finalize the setup of its Real Estate Investment Trust (REIT) in 2016.  

 

Laggard play with better earnings ahead. With operations improving, we expect ERW’s earnings to turn up to the black in 4Q15. Besides the better earnings ahead, ERW is attractive as a laggard play since, over the past three months, its share price has risen 16%, far behind +32% for CENTEL and +35% for MINT. We maintain BUY on ERW with TP of Bt6.5/share.