The Erawan Group

The Erawan Group Plc (ERW)

-A pure hotel play, ERW is positioned to hit the jackpot from the record high international tourist arrivals in 1Q13F, bringing core earnings to a record high of Bt140mn, up 41% YoY and 168% QoQ.
-Q2 2013 outlook: Continued momentum in April plus extra gain from the sale of two economy hotels to Erawan Hotel Growth Property Fund (ERWPF) that will be booked in the quarter.
-Maintain BUY with 2013 TP at Bt6.75/share (Bt6.6/share for ERW and Bt0.15/share for its 20% holding in ERWPF).
Record-high industry stats. 1Q13 international tourist arrivals soared 19% YoY and 11% QoQ to a record 6.8mn. Major contributors to growth were China (+94% YoY), Russia (+26% YoY), Japan (+22% YoY) and India (+18% YoY). As a pure hotel play with exposure to all segments, ERW is ideally situated to gain from the sunny industry environment. We estimate ERW’s 1Q13 RevPar growth at 10% YoY, backed by a high 85% occupancy rate (from 79% in 1Q12) and 2% average room rate growth. EBITDA margin should widen to 35% from 34% from the operating leverage on fixed cost. Taken together, these factors are pushing core earnings up 41% YoY and 168% QoQ to a record estimated Bt140mn.
Strong momentum in April. ERW guided that the strong momentum is continuing in April, driven by the popular Thai new year celebrations, Songkran. Questioned about concerns on terrorist attacks and an epidemic (e.g. H7N9 bird flu), ERW said that so far it has seen no negative signs in terms of cancellations over the next few months. Although the baht is appreciating against foreign currencies, e.g. 6% against the US$, we see limited impact on ERW’s operations as it quotes room rates in baht. Thailand’s ARR compared to other countries in the region is also competitive at about half of Hong Kong’s and Singapore’s.
Earnings jump in 2Q13 from huge extra gain. Management expects Bt800mn gain on the sale of two economy hotels, ibis Patong at Phuket and ibis Pattaya at Chonburi, to Erawan Hotel Growth Property Fund (ERWPF), which will be booked in 2Q13. This is higher than our estimate of Bt700mn. We estimate the sale will reduce ERW’s net debt to equity ratio to 1.7x from 2.0x. Assuming a 35% dividend payout ratio, we estimate 2013 dividend at Bt0.13/share: Bt0.03/share from operations and Bt0.10/share from the gain on the sale of two hotels to the fund. ERW will use ERWPF as a financial vehicle for future asset monetization and plans to put one to two hotels per year into the property fund.
Maintain BUY with 2013 TP at Bt6.75/share. ERW is our top pick in the Thai tourism sector and we rate BUY at 2013 TP of Bt6.75/share consisting Bt6.6/share for ERW and Bt0.15/share for its 20% holding in ERWPF. We like ERW, with the best exposure to tourism, a strong earnings upswing in 2013-14 and attractive valuation at 0.4x PEG. While others will hit the doldrums in the 2Q13 low season, ERW will sail past with its extra gain from the sale of two economy hotels to ERWPF.