The Erawan Group

The Erawan Group Plc (ERW)

Although ERW’s share price has already come up 11% over the past three months on the strength of its record high earnings in 1Q16, share price has further support from two positives – a strong low season for Thai tourism and declining interest rate – poised to give ERW its first low season core profit since 2009. ERW remains our hotelier top pick and we rate BUY with TP at Bt6.5/share.

 

Better low season. ERW’s QTD operational statistics suggest a stronger low season. Excluding its budget hotel (HOP INN), which distorts figures because of small contribution, revenue per available room (RevPar) has grown is 4% YoY QTD, continuing from 5% YoY growth in 1Q16, backed by a high occupancy rate of 85% (from 77% in 2Q15 and slightly lower than 88% in the 1Q16 high season) while average room rate (ARR) slid 3% YoY as ERW uses pricing to boost occupancy rate in its economy segment. By segment, the luxury hotel segment (Bangkok, Phuket and Samui, at 51% of 1Q16 revenue) show the strongest RevPar growth QTD at 10% YoY. 

 

Benefit from declining interest rate. Lead banks cut lending rates in early April and this is a plus for ERW, as all interest-bearing debt is baht-dominated and floating-rate. As of March, interest-bearing debt was Bt8.5bn implying interest-bearing debt to equity at 1.7x. Assuming a 25 bps cut in MLR effective through to end-2016, interest expense will come down an estimated Bt16mn, giving ~4% upside to 2016 core earnings. 

 

2Q16: first low season core profit since 2009. In 2Q16, we expect ERW to report its first core profit in low season since 2009 at Bt7mn – improving from the Bt25mn core loss in 2Q15 but seasonally down from Bt189mn profit in 1Q16. Including Bt12mn extra gain on sale of four shophouses, we estimate ERW’s net profit at Bt19mn in 2Q16.

 

Expansion is on track. This year, ERW’s expansion is focusing on HOP INN hotels, its first branded budget hotel, introduced in 2014. Currently, it has 18 HOP INN hotels and these contribute 2% of revenue and a small profit. It plans to open four more HOP INN hotels: at Sakhon Nakorn in 2Q16, Chiang Mai in 3Q16, Hat Yai and the Philippines (its first HOP INN overseas) in 4Q16. Its five-year plan (2016-2020), proposes 50 HOP INN hotels in Thailand and 20 HOP INN hotels in the Philippines, raising the contribution from its HOP INN segment to 16% of total revenue.  

 

Maintain BUY with TP at Bt6.5/share. Although the record high earnings in 1Q16 have driven ERW’s share price up 11% over the past three months, the positive backdrop of a strong low season for Thai tourism and declining interest rate will give ERW its first core profit in low season since 2009 and further support the share price. Of hoteliers, ERW is our top pick and we rate BUY with TP at Bt6.5/share.