The Erawan Group’s New Project: A Double-Edged Sword?

By UOB Kay Hian, December 6, 2024

Introduction to The Erawan Group

The Erawan Group, a prominent hotel investment company in Thailand, boasts a diversified portfolio ranging from luxury to mid-scale and economy hotels across key tourist destinations in the country. This comprehensive analysis by UOB Kay Hian evaluates the company’s recent developments and projects, providing a detailed outlook on its financial health and market performance.

Company Overview and Market Performance

With a share price of Bt3.92 and a target price of Bt4.60, The Erawan Group has an upside potential of 17.3%. The company is categorized under the Consumer Discretionary sector and is listed on the Bloomberg ticker as ERW TB. The Erawan Group has issued 4,886.9 million shares, giving it a market capitalization of Bt19,156.8 million or US\$547.4 million.

The stock has witnessed a 52-week high and low of Bt5.55 and Bt3.40, respectively. The price performance over various periods shows a decline, with a 1-month change of -9.7%, 3-month change of 10.7%, and a year-to-date change of -25.3%.

Key Shareholders and Financial Metrics

The major shareholders include the Wattanavekin family with 28.2% and the Vongkusolkit family with 28.4%. The financial metrics for the fiscal year 2024 indicate a NAV per share of Bt1.56 and a net debt per share of Bt2.70.

New Project: Prospects and Challenges

The Erawan Group recently announced a significant new project involving a long-term land lease agreement. This project, located near BTS Phrom Phong, is a 30-year lease with an extension option for another 30 years, encompassing 2 rai of land. The primary goal is to develop a project targeting the premium economy to upscale segments, with a capex of Bt8.1 billion and an estimated IRR of 8-9%.

While this development has potential, the decision to operate under a Franchise or Hotel Management Agreement instead of launching its own brand may limit the company’s ability to fully capitalize on the project’s upside. Approximately 70% of the funding is expected to come from institutional loans, with the remainder from internal funds.

Potential Prolongation of the Downcycle

The announcement of this new project has led to concerns about extending the company’s downcycle. With renovations of existing properties such as the Grand Hyatt and the Holiday Inn Pattaya, the company may face reduced revenues and increased expenses. The capex cycle for the new project will add further pressure through depreciation and interest expenses.

Lease Extension and Renovation Impacts

The lease extension issue at the Grand Hyatt is expected to be an overhang for at least two more years, with negotiations ongoing for the 20-year extension rate. The potential for a higher lease rate could impact the bottom line, although an uplift in room rates post-renovation may offset this.

Financial Performance and Outlook

Key financials show a mixed outlook, with net turnover expected to grow from Bt7,039 million in 2023 to Bt8,891 million by 2026. EBITDA and net profit projections also indicate growth, although the company faces challenges such as increased capex and renovation expenses.

Conclusion and Recommendation

In summary, while The Erawan Group demonstrates strong potential in its core operations, the strategic decision to not leverage its own brand in the new project and the ongoing renovation and lease challenges suggest a cautious approach. UOB Kay Hian maintains a BUY recommendation with a revised target price of Bt4.60, reflecting a more conservative valuation approach.

Environmental, Social, and Governance (ESG) Considerations

The company’s commitment to ESG principles is notable, with a focus on resource efficiency, greenhouse gas reduction, and biodiversity management. Socially, the company emphasizes human rights, equality, and employee development. Governance structures promote diversity and include independent board members.

Disclosure

This analysis was conducted by UOB Kay Hian, and the views expressed are independent of any business dealings with The Erawan Group.