The Erawan Group

The Erawan Group Plc (ERW)

In line with our model: ERW posted a 2Q12 net profit of Bt4m, down by 99% YoY and 96% QoQ. The result was in line with our estimate, but beat the consensus projection (net loss of Bt13m). The YoY bottom-line plunge was due to huge gains in 2Q11—Bt664m in asset sales (Ploenchit Center) to a property fund.
Results highlights: The black ink on the 2Q12 bottom-line was because of a Bt19m net gain from selling land in Srirach. On a YoY basis, excluding a Bt664m extra gain in 2Q11, the 2Q12 performance improved substantially from a deep loss of Bt83m in 2Q11. The recovery was led by 17% growth in hotel revenue and fatter GM (up from 47.3% in 2Q11 to 53.5%). The QoQ dive was because of seasonality (the first-quarter is the best for tourism). Although the net gearing ratio increased from 1.86x at end-March to 2.02x at end-June, management said there is no justification for recap concerns.
Hotel RevPar rose 9% YoY in 2Q12 (the occupancy rate increased from 67% to 73%; the room rate was flat at Bt2,225/night), but dived 21% QoQ on seasonality (the 1Q12 occupancy rate was 79%; the mean room rate fell 14% QoQ).
Outlook: We expect a core loss for 3Q12, but it will be a big YoY improvement from a deep core loss of Bt68m posted for 3Q11 (The Naka Luxury Collection Phuket was closed for re-branding in 3Q11). Then, ERW will report a turnaround for 4Q12 high season. 
What’s changed? Our net profit forecast stands at Bt137m for FY12 (75% achieved in 1Q12). 1H12 net profit comprises 76% of the consensus FY12 projection.
Recommendation: ERW’s multiples lag those of its peers. The stock trades at a YE12 PBV of 1.5x, far below its FY06-11 mean of 1.9x and the current sector average of 2.8x. We maintain our TRADING BUY rating with a YE13 target price of Bt3.20. based on a 35% discount to DCF value (14% WACC and 1% terminal growth rate). Management intends to boost shareholder return through asset monetization, which would mean scope for bottom-line upside.