The Erawan Group

The Erawan Group Plc (ERW)
Above our estimate
ERW reported a net profit of Bt148m for 1Q13, up by 50% YoY and 221% QoQ. The result was 11% above our estimate, due to a 1.1% lower SG&A/sales ratio than expected. 1Q13 earnings were in line with the consensus preview.
Results highlights
The impressive YoY bottom-line growth was led by hotel revenue of Bt1.3bn (all-time high), up by 11% YoY, and a lower effective tax rate (from 16% in 1Q12 to 9% in 1Q13). Hotel RevPar rose across all price segments—up 8% YoY for Bangkok five-star, up 33% for luxury resorts (driven by 65% growth for Naka Phuket Resort), up 4% for mid-scale hotels and up 21% for the Ibis brand. The YoY RevPar jump was driven by both occupancy rate (except for mid-scale brands—the occupancy rate dipped 3.5% YoY with the opening of the Mercure Siam) and room rate increases. On a QoQ basis, profit growth was led by seasonality. The net gearing ratio was stable QoQ at 2.1x at end-March. 
Outlook
ERW will report a record net profit for 2Q13, due to Bt860m in gains from selling two Ibis hotels (Pattaya and Patong) to the property fund (ERWPF). The firm posted a very low net profit of Bt4m for 2Q12. In 2Q13, the gains from asset sales will outweigh the effect of a core operational loss during low tourism season. The net gearing ratio at end-June is expected to plunge to 1.3-1.4x (its lowest level since 2006).  
What’s changed? 
1Q13 net profit represents 67% of our FY13 core earnings forecast (but only 14% of our net profit model for the year). We maintain our core projection at Bt220m, as ERW will post core operational losses in 2Q-3Q13—the two quarters are tourism low season.
We believe the consensus FY13 core profit forecast of Bt394m is too bullish.
Recommendation
Our BUY rating stands with an unchanged YE13 target price of Bt7.0, a 10% discount to DCF value. The current share price of Bt5.2 is far below replacement value of Bt6.20/share. ERW’s FY13 core PEG ratio (excluding gains from asset sales to ERWPF) is only 0.4x. The stock trades at an FY13 net PER of only 11.9x. In the short-term, a record high 2Q13 bottom-line should boost investor interest in ERW. Besides, there is also scope for long-term earning upside from the new business model, which is expected to be unveiled at about mid-year.