The Erawan Group
2Q16: As expected, profit in low season BUY
The Erawan Group Plc (ERW)
The first low season core profit since 2009. 2Q16 net profit was Bt17mn, turning up from a net loss of Bt25mn in 2Q15 but seasonally down from net profit of Bt191mn in 1Q16. Excluding the Bt16mn extra gain on sale of four shophouses shows a core profit of Bt1mn – the first core profit in low season since 2009. This was in line with SCBS and market estimates. 1H16 core earnings were Bt190mn, up 67% YoY.
2Q16 highlights:
- In 2Q16, Thailand’s international tourist arrivals were 7.6mn, up 8.2% YoY (but down 16% QoQ on seasonality). China remained the biggest single contributor at 30% of total international tourist arrivals, supplying 2.3mn visitors, up 13% YoY (-14% QoQ). Tourists from Russia (3% of Thailand’s international tourist arrivals) are coming back, growing 38% YoY (-46% QoQ). This made 2Q16 the second quarter in a row for positive YoY growth after a decline beginning in 2Q14.
- 2Q16 revenue was Bt1.2bn, up 3% YoY but down 20% QoQ. Excluding budget hotels (HOP INN), revenue per available room (RevPar) in 2Q16 grew 2% YoY but fell 24% QoQ on seasonality. RevPar YoY growth comes primarily from a rise in occupancy rate to 82% from 77% in 2Q15. By destination, the strongest RevPar growth was in Phuket, mainly thanks to the return of tourists from Russia.
- ERW operated 5,934 rooms as of June 2016, up 13% YoY and 3% QoQ, mainly from adding more HOP INN hotels. In 2Q16, ERW opened two HOP INN hotels, in Chantaburi and Sakonnakhon, bringing it to 19 HOP INN hotels with 1,483 rooms as of June 2016.
EBITDA margin was 23.2%, up from 22.1% in 2Q15 but down from 32.8% in 1Q16.
- Interest-bearing debt to equity was 1.7x as of June 2016, relatively stable from March 2016 and below ERW’s debt covenant of 2.5x.
Strong operations continuing. ERW operations continue to do well. Excluding HOP INN hotels, RevPar in July grew ~11% YoY, underwritten by a higher occupancy rate of 87% (vs. 79% of July last year). ERW is building three more HOP INN hotels in Thailand – in Chiangmai, Hatyai and Phuket – and expects to open these in 3Q-4Q16. It plans to open a HOP INN hotel in the Philippines, its first hotel abroad, in 4Q16.
Top pick. Rate BUY at Bt6.5/share. ERW’s share price has risen 15% over the past month and we expect price to continue to move up, supported by an earnings uptrend brought by Thailand’s good tourism climate. We maintain BUY with TP at Bt6.5/share and, of hoteliers, ERW remains our top pick.
