The Erawan Group

The Erawan Group Plc (ERW)
 

Above: The 1Q12 core profit was above our estimate, mainly due to better-than expected operating margin. ERW reported core earnings of Bt99m, up 26% YoY and a turnaround from the Bt101m loss posted for 4Q11. The result was in line with the consensus.
Results highlights: The IBIS Hua Hin opened on Jan 16, 2012 (adding 200 rooms to ERW’s portfolio). The strong YoY profit growth in 1Q12 was driven by top-line expansion (up 10% YoY to Bt1.2bn), fatter GM (from 54.5% in 1Q11 to 56.5%) and a lower effective tax rate (22% in 1Q11 to 16%). The QoQ bottom-line turnaround was because of seasonality (the first-quarter is the best of the year for tourism). Hotel revenue jumped 39% QoQ and Hotel GM expanded from 46.1% in 4Q11 to 56.5% in 1Q12. The net gearing ratio declined from 1.96x at YE11 to 1.86x at end-March.
Hotel RevPar rose 5% YoY in 1Q12 (the occupancy rate increased 2% to 79% and the room rate 2% to Bt2,573/night). RevPar jumped 37% QoQ (the 4Q11 occupancy rate was only 65%; the 1Q12 room rate rose 13% QoQ).
Outlook: ERW will post a slight core loss for 2Q12 and an only modestly black bottom-line (due to an Bt18m net gain from selling a land plot in Sri Racha). As such, net earnings will plunge YoY—in 2Q11 the firm posted a gain of Bt664m from selling Ploenchit Center to a property fund. But the 2Q12 core performance will be much improved YoY (a deep core loss of Bt83m was reported for 2Q11).
What’s changed? We have revised up our core profit forecasts from Bt68m to Bt119m for FY12 and from Bt123m to Bt203m for FY13. The re-branding and re-opening of The Naka Luxury Collection, Phuket, will boost revenue (its occupancy rate rose to 62% in 1Q12 from 28% in 1Q11).
Recommendation: Management intends to boost shareholder return through asset monetization—we expect Bt1bn in gains in 2H12. ERW’s multiples have yet to reflect its FY12 core earnings turnaround. The stock trades at an FY12 PBV of 1.6x, far below its FY06-11 mean of 1.9x. We maintain our TRADING BUY rating with an upgraded target price of Bt3.10 (up from Bt3), due to earnings forecast upgrade.