The Erawan Group

The Erawan Group Plc (ERW)

Investment thesis
ERW will report strong earnings for 1H13 (YoY growth for 1Q13 and a record high 2Q13 bottom-line). Core operational losses in 2Q-3Q13 low season—due to renovations at the Grand Hyatt Erawan Bangkok—are not an issue. There is scope for earnings upside from management’s anticipated announcement of a new business model (expected in May). Pegged to the market value of Ibis hotels (Bt3.5m/room), we have re-calculated ERW’s replacement value at Bt6.3/share (far above the current share price of Bt5.60). Our BUY rating stands with a YE13 target price of Bt7, a 10% discount to DCF value.
Expect  33% YoY growth in Q1 2013 core profit
We estimate a 1Q13 core profit of Bt133m, up by 35% YoY and 156% QoQ. Hotel revenue should set a new record of Bt1.3bn, up by 11% YoY and 12% QoQ. Although two new hotels (Mercure and Ibis Siam) opened in Dec 2012, 1Q13 NM should post a rise of 1.8% YoY to 10.3%, due to lower tax expenses and a smaller loss at Naka Phuket. 1Q13 RevPar would have jumped for all price segments—up by 33% YoY for luxury, 21% YoY for budget, 7% YoY for luxury Bangkok and 4% for tourist (excluding the two new hotels, tourist growth would be 21%).
Price rate increases across all segments
In 1Q13, ERW’s room rates rose by 30% for luxury (driven by Naka Phuket, which offered promotional rates last year), 9% for tourist, 5% for luxury Bangkok and 4% for budget. The budget segment had the highest occupancy rate hike in 1Q13, up 12% YoY to 90%. The occupancy rate for the luxury segment inched up only 1%. The tourist occupancy rate dipped 3.5% YoY to 81%, skewed down by low numbers for the new Mercure and Ibis Siam hotels (excluding the two hotels, the tourist occupancy rate rose 6% YoY to 90%).    
Asset sales to property fund to make for record Q2 2013 bottom-line
Erawan Hotel Property Fund (ERWPF) launched successfully this month. ERW divested two properties—Ibis Pattaya and Patong—to ERWPF worth a total of Bt1.8bn (ERW holds 20% of ERWPF). We estimate that the firm will realize an Bt850m net gain from selling the two Ibis-branded hotels to ERWPF in 2Q13, making for a record 2Q13 net profit (we previously assumed a gain of only Bt780m). The net gearing ratio is anticipated to fall to 1.7x at end-June from 2.1x at YE12, the firm’s lowest since 2008.
Core operational decline during low season, due to renovation
ERW is likely to report core losses for the 2Q-3Q13 low season, as 40% of the room inventory at the Grand Hyatt Erawan Bangkok will be closed for renovation (60% of the rooms were closed in 2Q-3Q12). After the renovation, room rates will rise significantly. We preliminarily estimate ERW’s core losses at Bt12m in 2Q13 (shallower than the net loss of Bt15m in 2Q12) and Bt35m in 3Q13 (Bt54m in 2Q12).