The Erawan Group

Long-term earnings forecast upgrade prompts valuation re-rating

The Erawan Group Plc (ERW)

Investment thesis

We maintain our BUY call with a higher YE13 target price of Bt5 (up from Bt4.20) to incorporate with our earnings forecast upgrades for FY15 onward (two new hotels in Pattaya) and a 2% cut in WACC to 12.0% (11.5percent sector mean). We see scope for further earnings upside from a new Ibis hotel in Bangkok (location not yet announced) and huge gains from asset sales in 2Q13. ERW trades at an FY13 PEG ratio of 0.4x (1.0x sector mean) and a 21% discount to its replacement value (Bt5.09/share).

Incremental value from two Pattaya hotels in FY15 onwards

We have factored in the effect of 10% room inventory expansion with the extension of the Holiday Inn Pattaya and the opening of the Mercure Pattaya, as construction started recently. The new rooms are expected to open in late FY14 and make full earnings contributions in FY15. Thus, we have revised up our FY15-16 profit forecasts by 3%. Revenue is projected to jump 19% YoY in FY15 (following 12% growth in FY14).

4Q12 earnings turnaround

ERW has posted a high occupancy rate of 78percent for 4Q12-to-date (64% in 4Q11) and a 15% YoY room rate increase, making for 45% YoY RevPar growth. Thus, we expect a 4Q12 net profit (net loss of Bt54m for 3Q12 and huge loss of Bt101m in 4Q11). Furthermore, 1Q13 earnings will rise QoQ on tourism high season and a recovery at the Naka Phuket Hotel. Revenue at Naka Phuket is expected to jump by 149% YoY in 4Q12 and 62% YoY in 1Q13 (Naka's occupancy rate rose from 38% in 4Q11 to 60% in 4Q12 and should hit 68% in 1Q13; its room rates jumped 30% QoQ in 4Q12).

FY13 revenue growth target of 18-20% (better-than our model)

ERW has set a total revenue growth target range of 18-20percent for FY13 (our model is15%). The performances of the two collocated new hotels that opened on Dec 12, 2012 (Ibis and Mercure at Siam) might beat our forecast, given the great location. In FY13, we conservatively assume only Bt650/night RevPar for Ibis Siam versus ERW's FY12 Ibis RevPar mean of Bt1,100/night; We expect Mercure Siam RevPar of only Bt1,500/night. By FY15, ERW plans for 20 hotels (16 currently)—a 29% rise in room inventory to 5,000 focused on the economy and mid range price segments.

Establishing a property fund to enhance shareholder returns

The property fund will optimize returns to shareholders and to boost long-term earnings growth. ERW plans to divest at least one hotel per year to the property fund. The benefits will be a higher ROE, cash inflows from the asset sales (which will enable higher dividend payments) and a healthier balance sheet (lower leverage). In 2Q13, ERW intends to divest two economy hotels—Ibis Pattya and Ibis Patong for Bt1.5-2bn. Under our low-case scenario, assuming a 20percent stake in the property fund, we estimate a gain of B624m (Bt0.25/share), which would mean the following for FY13—a record net profit of Bt844m, Bt0.09 DPS upside and an unprecedented ROE of 19%.

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Article source: http://www.thethailandlinks.com/2012/12/14/the-erawan-group/