Central Plaza Hotel

Central Plaza Hotel Plc (CENTEL) 

 

Investment thesis

We recommend accumulating the stock, given recovery signs in July-Aug and expectations that earnings will normalize in 4Q14. CENTEL trades at an FY15 PER of 33.7x, 1SD above its FY06-13 mean. But in previous years, the stock has traded at up to 2SDs above its long-term mean during high season. Our BUY rating stands, with a YE15 target price of Bt47, a 5% discount to DCF value (8.2% WACC, 2% terminal growth).  

Forecast cut for FY14; strong FY15 earnings growth expected

We have revised down our FY14 core profit forecast by 9%, which mostly reflects higher-than-expected 1H14 tax expenses (we now assume an effective FY14 tax rate of 25% against 20% previously). But our FY15 profit forecast stands unchanged at Bt1.6bn. Low FY14 earnings will mean hefty profit growth of 28% for FY15. Our key assumption is RevPar growth of 4% for FY14 and 10% for FY15.  

Recovery signs in July-August numbers 

CENTEL guides that its Hotel occupancy rate rose from 69% in 2Q14 to 72% in July and 78% in August and the mean room rate expanded 11% YoY in July-Aug, even though it was low season (YoY growth of 11% for hotels in Bangkok, 5% for Thailand upcountry and 8% for the Maldives). That would mean RevPar growth of 1% YoY in July-Aug. Surprisingly, Centara Grand Central World posted 1% YoY RevPar growth in August after a YoY drop for 7M14. Food SSS rebounded 7.8% YoY in July and about 5% in August. TSSG was16% YoY in July and about 10% in Aug.    

FY14 operational targets imply strong 2H14 numbers

Management targets an occupancy rate of 75-76% for FY14 (80% in FY13) and mean hotel room rate growth of 6-7% making for RevPar expansion of 3-4%. The implication is that the occupancy rate will rise from 72% in 1H14 to 80% in 2H14. We assume occupancy rates of 75% in 3Q14 (down 4% YoY) and 80% in 4Q14 (flat YoY). Food business SSS will turn around from slippage of 0.9% YoY in 1H14 to growth of 2% in 2H14; TSSG of 11% is modeled for 2H14. Quarterly core profit bottomed out for the year in 2Q14 at Bt42m; we expect it to bounce to Bt120m in 3Q14 and recover fully to Bt611m in 4Q14. 

A cleaner balance sheet will support new investments

The gearing ratio is set to decline from 1.0x at end-June to 0.9x at YE14 and 0.8x at YE15—the cleanest balance sheet in CENTEL’s history. Thus, the firm is keen to make new investments. It plans to build a new Bt6.6bn five-star hotel in Cha-am (the land plot is owned by Chirathiwat family), to open in 2014. CENTEL will also purchase the remaining 50% stake In Centara Kata Resort Phuket that it doesn’t yet own. Moreover, it intends to acquire a new food brand (an operating asset that is profitable) for a price range of Bt500m-1bn. New investments would mean scope for upside to our long-term earnings model.