We maintain our 3-month tactical call of Neutral on CENTEL as it lacks a near-term catalyst as 3Q23 earnings are unexciting. However, things will look up in 4Q23, Thailand’s high season for tourism. Share price is down 11% after the 2Q23 disappointment. We see a good entry point as below Bt42/share, implying 30x 2024PE, below its historical average (31x). Our TP is unchanged at Bt50/share as the impact from the earnings cut is offset by rolling valuation to end-2024.
2023 target: Stronger hotel, slower food. For the hotel business, CENTEL has inched up its RevPar target by 1% to Bt3,400-3,700/room, driven by the operations and ARR of a JV hotel in Osaka (53% held by CENTEL) starting July, while overall occupancy rate target is maintained at 68-72%. At its food business, it has revised down its same-store sales growth (SSS) target to 5-7% from 7-9% and total revenue growth to 10-12% from 13-15% due to slower delivery services after full reopening. Delivery revenue to food revenue was down to 22% in 1H23 from 30% in 1H22.
Unexciting 3Q23. In 2Q23, CENTEL’s earnings were weak at Bt121mn, dragged down by rising costs at the hotel business: pre-operating expenses for the hotel in Osaka (Bt77mn), rising interest expense and higher costs for the leases of the hotel in Osaka and in Hua Hin (higher depreciation and interest expense). We do not expect much improvement in 3Q23 (up slightly QoQ, up YoY off a low base) as seasonally better hotel and food operations in Thailand will be offset by slow operations in Maldives and rising interest expense. In July, RevPar of hotels in Bangkok and provinces grew 14% and 18% from 2Q23 while Maldives dropped 14%. At the hotel in Osaka, occupancy rate was 59% in July and CENTEL expects it to rise to 70-75%, bringing this hotel to breakeven in 2H23 and profit in 2024. CENTEL expects food revenue to improve YoY and QoQ in 3Q23 with some improvement in EBITDA margin from easing raw material and utility costs.
Hotel renovations. CENTEL will start major renovations at Centara Grand Mirage Beach Resort Pattaya (7% of revenue) and Centara Karon Resort Phuket (less than 1% of revenue) in 3Q23-4Q24. The first will be partially renovated while the second will be closed during the renovations. CENTEL expects limited impact on operations and targets ARR to increase by 15% for the renovated rooms.
Earnings cut. CENTEL’s revised RevPar and SSS targets are in line with us but 2Q23 results came in below expectations on rising costs. We thus cut our 2023 core earnings forecast by 18% and 2024 by 21%. After the revision, we expect core earnings at Bt1.4bn in 2023 and Bt1.9bn in 2024.
Neutral rating. Our TP is unchanged at Bt50/share, based on SOTP valuation, as the impact from the earnings cut is offset by rolling valuation to end-2024 from end-2023. We see no near-term catalyst until earnings brighten in 4Q23 (high tourism season) into 2024.
Risks 1) An economic slowdown that would derail travel demand and 2) cost inflation that would damage the profitability of its hotel and food businesses.
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