The Erawan Group

The Erawan Group Plc (ERA) 

 

Investment thesis

The investment cycle in FY16-20 is set to back long-term earnings growth. Of our coverage, only ERW will gain a low-base benefit in FY16 from lag recovery aft the Erawan Shrine bombing on Aug 17, 2015. Our TRADING BUY rating stands, as ERW trades far below its replacement value of Bt7.5/share. A DCF-derived YE16 target price remains at Bt4.60, a 40% discount to DCF value (10.4% WACC, 2% terminal growth rate). 

Aggressive expansion in FY16-20 

ERW plans Bt10bn in total CAPEX in FY16-20 without recap risk (85% of greenfield hotels and the rest for renovation). Its portfolio will expand greatly from 33 hotels with 5,676 rooms at YE15 to 90 hotels with 10,000 rooms at YE20. New hotels are non-luxury brands, as revenue from this modest accommodation segment will jump from 45% in FY15 to 58% in FY20: from 53% to 65% for EBITDA contribution. Geography will be diversified, as non-Bangkok revenue contribution will expand 35% in FY15 to 45% in FY20: from 33% to 50% for EBITDA. ERW will build in Bangkok only one midscale hotel, a Novotel, on Sukhumvit Road in FY19.  

Rising Philippines exposure 

Investment policy in Philippines is concrete and accounts for 30% of the firm’s total investment during FY16-20. ERW plans to have 20 hotels in the archipelago by YE20, focusing on domestic demand, under midscale and economy brands (Novotel, Mercure and HOP INN). The first, a HOP INN, will open in Manila in 4Q16. Operations in the country are set to bring 10% to total revenue in FY20 and 13% for EBITDA.  

Aim to franchise budget brand

The firm recently opened 16 HOP INN hotels in provincial Thailand. Five new hotels will open in FY16 (Sakon Nakhon, Chumphon, Chanthaburi, Hat Yai and Chiang Mai). Despite being a new brand, operations run at almost break-even; its mean occupancy rate was 54% in FY15 against a 25% need for EBITDA break-even and 45% for its bottom-line break-even. With experience in economy hotels since 2008, ERW plans to roll out the budget brand employing a franchise model (management contract), which will stimulate quick expansion and returns.  

Conservative FY16 business target with asset sales to REIT 

Management targets a 3% RevPar growth and an occupancy rate of 80% in FY16 (up 6% YoY), near its last peak of 79% in FY13. Room rate mean is expected to drop 6% YoY due to the product mix—the higher contribution from HOP INNs. Total rooms will expand 11% to 6,310 after the company launches seven HOP INNs. Thus, inventory expansion will drive a 15% FY16 revenue growth target. EBITDA margin is set to gain 1.0% YoY by operating leverage benefits. ERW plans to divest some properties to a newly set-up REIT, valued in size in the range of Bt1.6-1.7bn (we guess two IBIS hotels). There are big gains if assets were to be sold to the REIT (yet to price in our model).