The Erawan Group

Takeaways from local NDR

The Erawan Group Plc (ERW)

Investment thesis

Last week, we invited Mr Krailuck Asawachatroj, ERW's CFO, to meet Thai fund managers. The key message is that 2013 will be a great year for ERW. We have upgraded our YE13 target price to Bt7.0 from Bt5.5 to reflect our new model. Huge gains from asset sales to a new property fund in April will make ERW the best dividend play in the sector for FY13 (at 2.1%). The firm plans to adopt a new business model once it receives the proceeds from asset sales in April—a positive surprise. Its core FY13 PEG is only 0.4x. Pegged to the market value of Ibis hotels (Bt2.9-3.3m/room), we have re-calculated ERW's replacement value at Bt6.3-8.1/share, up from Bt5.6/share. BUY!

Hotel growth strategy with de-concentration risk

ERW targets having at least 20 hotels and 5,000 rooms by YE15 (up from 16 hotels and 3,890 rooms currently). The expansion will concentrate on the mid range and economy segments. By YE15, the hotel portfolio will be more diverse in terms of both segmentation and geography—non-luxury segments will contribute 45% of revenue (35% in FY12) and ex-Bangkok hotels 40% of revenue (29% in FY12). In 4Q14, ERW will open the Holiday Inn Pattaya and the Mercure Pattaya. A new 500-room Ibis Bangkok (location undisclosed) is planned.

FY13 performance growth targets

The FY13 revenue growth target is 15%, making for big jumps in EBITDA and core profit. FY13 RevPar is conservatively expected to rise 10%, boosted by a 79% occupancy rate (75% in FY12) and a 4% higher room rate. The drivers will be 40% RevPar growth in the luxury resort segment, led by a turnaround at Naka Phuket (EBITDA in FY13 versus a Bt50m EBITDA loss in FY12).

Asset monetization to go ahead soon

ERW will sell Ibis Pattaya and Ibis Patong (Phuket) to its planned property fund in April 2013. The CFO said the property fund will be a financing vehicle—the firm intends to add at least one asset to the property fund per year. As well as freeing up funds for expansion, asset sales will bring visibility to the market value of ERW’s hotels. The book values of the two Ibis hotels to be sold equate to only Bt1.7m/room; ERW intends to sell them for at least Bt2.9m/room. Following the sales, the net D/E ratio will drop from 2.0x at YE12 to 1.4x at YE13.

Earnings forecast upgrade

We have upped our FY13 net profit forecast by 273% to Bt820m to factor in the expected Bt600m net gain from asset sales to the property fund (the CFO guides for a net gain of Bt600-800m, a fund size of Bt1.5-2.0bn and a 20percent stake in the property fund). The DPS for FY13 will rise to Bt0.08 (from Bt0.02). Income from the newly-opened Mercure Siam and Ibis Siam hotels will more than make up for the revenue lost from the two Ibis hotels to be sold to the property fund.