The Erawan Group
Deserves premium on arrival of new growth cycle BUYThe Erawan Group Plc (ERW)
The long wait for recovery is over and in our view ERW deserves a premium as
it marches into a new growth cycle with 84% EPS CAGR in the next two years.
As a pure hotel play with exposure to all segments, ERW is ideally situated to
reap the rewards from the record high tourist arrivals of 24.5mn expected in
2013. We maintain our bullish call on ERW, nearly doubling our 2013 TP to Bt6.0,
34% upside gain, as we apply higher EV/EBITDA of 15x (from 12x). BUY.
Strong tourist arrivals in 2013. Thai tourist arrivals achieved a record high of 22.3mn
or 16% growth in 2012 and are expected to continue flooding into Thailand this year, to
an estimated 24.5mn arrivals, or 10% growth. This is well above our earlier forecast of
23mn. The primary impetus is China, which is in much earlier stages of the trend for
outbound tourism. In 2013, Chinese arrivals to Thailand are expected to grow by 25% to
3.5mn, contributing 14% of Thailand's international tourist arrivals (from 13% in 2012)
and one-third of incremental international tourist arrivals.
Good platform with exposure to all market segments. We like ERW's hotel
platform that covers the entire market spectrum, from five-star to economy. This
places it squarely within the flow of tourists to reel them in as they separate into
different lodging levels. Covering the lower end of the range is becoming increasingly
important as the structure of tourist arrivals changes to those more budget-conscious
from emerging countries. Its presence in all price ranges gives it full exposure to
Thailand's steady rise to new highs in tourist arrivals.
Turnaround no longer a dream. ERW's operations were damaged greatly over 2009-
11, hit by one obstacle after another, from the turmoil in Thailand to the economic
problems globally and then by a placement problem with a luxury resort at Phuket in
2011 - even though that year saw a high 20% growth in tourist arrivals. We believe our
faith in its earnings turnaround in 2012 is well founded, secured by expected positive
earnings in 4Q12, the high season for Thai tourism. We raise our 2013-14 forecast to
factor in the more robust growth in tourism than earlier anticipated. Our new
projection suggests core earnings CAGR at 84% in 2013-14.
Higher valuation to reflect new earnings growth cycle. We raise 2013 TP to Bt6.0
(from Bt3.8) mainly driven by a higher valuation as we apply 15x EV/EBITDA (from 12x,
the five-year historical average). Our valuation is backed by 17% EBITDA CAGR in 2013-14
and the new TP at Bt6.0 implies a 0.5x PE-to-earnings growth (PEG) vs. the 0.7x average
of Thai hotel peers and 1.6x of regional peers. We view ERW as deserving of a higher
valuation as its earnings turnaround has become reality after the nightmares in 2009-
11. ERW is in the early stages of a new earnings growth cycle and this will expand ROE
broadly to 9% in 2014 from -5% 2011; it is our top pick in the tourism sector.
Catalysts and risks: Catalysts are: 1) Higher earnings growth in 4Q12-1Q13, 2) extra
gain from the launch of a property fund in 2Q13 (estimated at Bt600mn to Bt1.0bn) and
3) lower net debt to equity to 1.4x-1.6x from 2.0x. Risks are: 1) lower RevPar than
anticipated, 2) return of turmoil damaging Thailand's tourism and 3) high debt level.