The Erawan Group

The Erawan Group Plc (ERW)
Investment thesis
We see scope for further earnings upside from two new Ibis hotels (to be announced soon) and huge gains from asset sales to a property fund (in 2Q13). As such, we have increased our YE13 target price to Bt4.20 (from Bt3.80) by cutting the discount to our DCF value from 25% to 20% (in line with peers)—unchanged 14% WACC and a 1% terminal growth rate. ERW trades at a YE13 PBV of 1.8x, far behind the 4.2x sector mean. The current share price represents a 33% discount to the replacement value of its assets (Bt5.02/share).
No more red ink
The net loss of Bt54m posted for 3Q12 will be followed by a profit in 4Q12 (expected at Bt83m) and strong growth in 1Q13 (the best RevPar since 2008). The drivers are tourism high season, a recovery at the Naka Phuket Hotel and the full operational resumption of Grand Hyatt Erawan (only 79% of rooms were available in 3Q12, due to renovations; 94-98% of rooms will be available in 4Q12-1Q13). 4Q12 revenue will jump 45-47% YoY (79% occupancy rate versus 65% in 4Q11; room rate growth of 10% YoY).
FY13—first year of EBITDA for Naka Phuket since FY08
Revenue at Naka Phuket is expected to jump 149% YoY in 4Q12, as the occupancy rate will rise from 38% in 4Q11 to 60% in 4Q12 and there won’t be any promotional pricing. In 1Q13, we assume 62% YoY growth in RevPar, led by both occupancy (up 6% to 68%) and a 47% higher mean room rate (promotions last year). LBITDA of Bt90m for FY11 will diminish in FY12 and turn around to EBITDA of Bt70m in FY13 (though the full-year bottom-line won’t be in black ink till FY14).
Expansion continues
Expansion is concentrated on the budget and mid segments (Mercure and Ibis brands). The two segments will rise from 72% of the rooms in the portfolio currently to 81% in 2015. ERW will enlarge its hotel portfolio from 14 hotels to 20 hotels by 2015 and the number rooms will jump 40% to 5,000. Two new CBD hotels will open in Dec 12, 2012, Mercure Siam and Ibis Siam, adding 11% to the room inventory. In 4Q14, ERW will expand the Holiday Inn Pattaya and Mercure Pattaya. Two new Ibis hotels (in central Bangkok but no details) will be announced soon (to open by 2015).
Asset sales to property fund will boost all-time high FY13 earnings
ERW plans to sell Ibis Pattya and Ibis Patong to a new property fund in 2Q13 for Bt1.5-2bn. We have performed a sensitivity analysis (Figure 6) in which we assume the firm has a 20% holding in the property fund. Under our worst-case scenario, ERW will see a gain of B624m (Bt0.25/share). The gain is almost triple our FY13 core profit forecast of Bt220m. There is also scope for dividend upside from the gain of Bt0.09/share (pegged to a 2.57% yield). We conservatively anticipate that the D/E ratio will decline to 1.6x—the lowest level since 2007 (2.5x at end-Sept 2012). FY13 ROE will jump from 6% to 16% (equal to the FY06 level).