Central Plaza Hotel

Central Plaza Hotel Plc (CENTEL)

By our estimates, CENTEL will deliver 33% core earnings CAGR in 2011-14 and ROE will jump to 19% in 2014, higher than the 13% average for regional peers. The upward movement is being brought by an upswing in its hotel business and resilient quick service restaurant (QSR) business. LT outlook is promising with an expansion into the budget hotel segment, positioning it to reap the high growth from emerging markets. We initiate CENTEL as a BUY with mid-2013 TP at Bt19/share. The counter offers 24% ETR.
Strong hotel operations are key. The upswing in hotel operations is giving CENTEL an estimated 19% EBITDA CAGR in 2011-14, lifting the share of this business to 56% of total EBITDA in 2014 from 53% in 2011. CENTEL’s RevPar jumped 18% YoY in 2011 in response to a rebound in occupancy rate to 64% in 2011 from 58% in 2010. Underwritten by continuing healthy growth in Thailand’s tourism industry, we estimate CENTEL’s RevPar will grow 15% YoY in 2012 and 8% YoY in 2013. Revenues from management contracts are expected to grow 41% p.a. for the next three years to bring this source of revenues to 5% of total revenues in 2014. CENTEL’s long-term outlook is made more promising by its planned move into a lower segment via budget/economy hotels in 2014. This will broaden its coverage from its traditional five-star to the lower end segment – which is now growing rapidly as a growing middle class in China and India brings in more price-sensitive tourists.
Resilience of QSR. CENTEL operates 12 food brands with 617 outlets in Thailand. We estimate QSR EBITDA CAGR at 13% in 2011-14, backed by same-store sales (SSS) growth and outlet expansion. CENTEL’s QSR business should feel benefit as the QSR market in Thailand is growing with 9% CAGR in 2008-11, driven by a change in consumer lifestyle to eating more meals in the malls – furthered by community shopping mall expansion - and rising consumer spending.
33% core earnings CAGR in 2011-14 and strongest ROE among Thai peers. CENTEL’s accelerating earnings trend was interrupted in 2009-10 as hotels throughout the city were hit by the political turmoil in that period. Looking ahead, we estimate 16% and 33% for EBITDA and core earnings CAGR in 2011-14. CENTEL’s ROE is poised to recover from the sluggish 2005-10 during its investment cycle and unprecedented poor tourism with accelerating momentum from 11% in 2011 to 19% in 2014. CENTEL’s ROE will be highest in our coverage of the Thai tourism sector and also above regional peers in the hotel and food sectors and we see this as a key for re-rating.
Initiate coverage as BUY with mid-2013 TP at Bt19/share. We initiate CENTEL as a BUY with mid-2013 TP at Bt19/share, consisting of Bt11/share for its hotel business (based on 12x EV/EBITDA) and Bt8/share for its QSR business (based on 10x EV/EBITDA). We like its strong earnings growth profile and ROE improvement. As a supplementary valuation check, our DCF valuation suggests a higher mid-2013 TP of Bt21/share.
Resuming healthy earnings growth trend
CENTEL operates in two business arenas: hotel and quick service restaurants (QSR), providing a roughly equal percentage of profits. CENTEL’s accelerating earnings trend was interrupted in 2009-10 as hotels throughout the city were affected by the political turmoil in that period. CENTEL itself was hit hard by the forced closure of its flagship, Centara Grand & Bangkok Convention Center at Central World (CGCW). CENTEL overcame this and again became profitable in 2011 once calm was restored. Looking ahead, hotel and QSR businesses are expected to continue healthy growth, driven by the positive prospects for Thailand’s tourism industry and improving consumption.
Strong hotel operations
CENTEL owns 14 hotels (including three that are joint ventures) with over 3,700 rooms in Thailand’s major tourist destinations including Bangkok, Pattaya, Phuket, Hua Hin, Samui and Krabi, and in tourist spots overseas such as the Maldives. CENTEL also manages 17 hotels with over 2,200 rooms in Thailand (14 hotels with ~2,000 rooms) and abroad (three hotels with ~200 rooms).
Occupancy rates high, RevPar increases. CENTEL’s average occupancy rate rebounded to 64% in 2011 from 58% in 2010, backed by an outstanding growth of 20% in Thailand’s international arrivals. This is expected to continue with an estimated growth in tourist arrivals of 10% this year and 7% in 2013 (long-term historical average growth). On this basis, we estimate CENTEL’s hotel average occupancy rate will increase to 70% in 2012 and 72% in 2013. This level will allow CENTEL to increase average room rate (ARR, Bt/room/night) and we expect its average ARR to increase by 3% in 2012 and 5% in 2013, bringing average revenues per available room (RevPar) up by 15% YoY in 2012 and 8% YoY in 2013.
Reopening of Centara Grand at Central Ladprao (CGCP). Another positive is the reopening of Centara Grand at Central Ladprao (CGCP) in February 2012. This hotel was the group’s largest contributor in 2009 but then underwent major renovations in 2010-11. Its return to full operations will open up more rooms to meet the high demand.
Increasing management contracts to leverage brand. CENTEL plans to leverage its own strong brand “Centara” by increasing hotel management contracts. It has 14 hotels under management with ~4,400 rooms through 2014 in the pipeline. The asset-light strategy offered by management contracts delivers revenues without the investment risk inherent in a self-built hotel. We estimate revenue from management contracts will grow 41% p.a. in the next three years and almost double to 5% of hotel revenues in 2014 from 2.8% in 2011.
portfolio through 2016. Of this, it expects four or five to be its own, with the remainder being management contracts. We expect the first new budget/economy hotel project to start this year and open in 2014, taking two years for construction. This will broaden its coverage from its traditional five-star to the lower end segment, and allow it to gain from the strong growth in price-sensitive tourists from the major growth areas such as China and India.
Healthy QSR from rising consumption
Operates 12 food brands with 617 outlets. CENTEL has rights to twelve QSR brands: KFC, Mister Donut, Auntie Anne’s Pretzels, Pepper Lunch, Beard Papa’s, Cold Stone, Chabuton, Ryu, The Terrace, Café Andonand, Yoshinaoya and Ootoya, with a total of 617 outlets in Thailand.
QSR business is growing in Thailand. The QSR business is growing strongly in Thailand as consumer spending rises in tandem with lifestyle changes to fewer home-cooked meals, more restaurant meals and the expansion of community shopping malls (where its outlets are usually located). The Ministry of Commerce reports that Thailand’s QSR market grew at an 8% CAGR in 2008-11.
Rising number of Japanese food brands. Japanese food is popular in Thailand - clearly seen in the revenue growth of 14% CAGR in 2008-11. With four Japanese brands (Chabuton , Ryu, Yoshinoya and Ootoya), CENTEL should benefit. Revenue contribution from these brands to total QSR business was 6% in 2011, increasing from 1% in 2010.
Healthy growth in CENTEL’s QSR. With the positive industry backdrop including increasing consumer purchasing power brought by the higher minimum wage, CENTEL’s QSR business should continue to grow well. We estimate 21% QSR revenue growth in 2012 boosted by: 1) 5% SSS, 2) 35 additional stores and 3) full-year contribution from Ootoya, which CENTEL acquired in September 2011.
Accelerating earnings growth
16% EBITDA and 33% core earnings CAGR in 2011-14. Backed by a positive outlook for Thailand’s tourism industry and higher revenues from hotel management contracts, we expect a strong upswing in the hotel business at 19% EBITDA CAGR in 2011-14, higher than the 13% CAGR for the QSR business. The hotel business will account for 57% of total EBITDA in 2014. We estimate 33% core earnings growth CAGR in 2011-14. CENTEL’s ROE decelerated in 2005-10 during its investment cycle and the unprecedented turmoil that turned tourists away from Thailand in 2009-10. The strong core earnings growth profile will boost ROE to resume its healthy trend; we expect it to reach 19% in 2014 – the high end of the range among Thai peers or even regional peers in hotel and food sectors.
Central Plaza Hotel PLC
Company background
CENTEL is the official registered name of Centara Hotels & Resorts (CHR), managing and operating a chain of first-class hotels throughout Thailand and the region, mainly in business and tourism areas. Apart from operating a chain of leading city hotels in Bangkok as well as premier resort properties in key tourist destinations in Thailand, CENTEL also operates 12 major quick service restaurant (QSR) and fast food outlets: KFC, Mister Donut, Auntie Anne’s pretzels, Pepper Lunch, Beard Papa’s, Cold Stone, Chabuton, Ryu, The Terrace, Café Andonand, Yoshinaoya and Ootoya.
The major shareholder is the company founder, the Chirathivat family.
Investment thesis
We like CENTEL’s strong earnings growth profile and its plan to move into the lower segment with budget/economy hotels. The broad coverage from five-star to the budget/economy segment will give CENTEL access to more travel demand, particularly from the rapidly growing but price-conscious middle-income tourists from China and India. Its strong earnings growth profile will boost ROE to the high end for Thai and regional peers. Its strong fundamentals are key to share price re-rating in our view.
Valuation
We initiate CENTEL as a BUY with mid-2013 TP at Bt19/share, based on sum-of-the parts methodology, consisting of Bt11/share for the hotel business (based on 12x EV/EBITDA) and Bt8/share for the QSR business (based on 10x EV/EBITDA).