The Erawan Group

Q4 2012 turnaround, as expected; even stronger numbers expected for Q1 2013

The Erawan Group Plc (ERW)

In line with estimate

ERW reported a core profit of Bt52m for 4Q12, a turnaround from a core loss of Bt103m in 4Q11 and red ink of Bt54m in 3Q12. The result was in line with our estimate and the consensus. As we expected, the firm posted a core profit of Bt82m for FY12 (against a core loss of Bt176m in FY11).

Management announced a DPS of Bt0.0189 (slightly above our estimate and the consensus). XD on March 12; payment on May 23.

Results highlights

The 4Q12 bottom-line turnaround was led by hotel revenue of Bt1.1bn, up by 37% YoY and 24% QoQ, and fatter hotel GM—from 46.1% in 4Q11 and 46.7% in 3Q12 to 51.6% in 4Q12. ERW was hit hard by the 4Q11 flooding and the 3Q12 red link was because half the rooms in the Grand Hyatt Erawan Bangkok were closed for renovation. In 4Q12, Hotel RevPar improved across all price segments—up 57% YoY for Bangkok five-star properties, up 52percent for the Renaissance Samui, up 51percent for Naka Phuket Resort, up 30percent for mid-scale hotels and up 19percent for Ibis-branded locations. The YoY RevPar jump was driven by both volume and occupancy rate. The net gearing ratio was stable at 2.1x at YE12.

Outlook

ERW will continue to post both YoY and QoQ core profit growth for 1Q13, which is high season for Thai tourism, boosted by even better numbers for Naka Phuket. In 2Q13, it will sell Ibis Patong, Phuket and Pattaya to Erawan Hotel Growth Property Fund (ERWPF). We preliminarily estimate a net gain of Bt600m in our model.

What's changed?

We expect a core profit jump from Bt82m in FY12 to Bt220m in FY13, due to the low base set by Naka Phuket Resort and Grand Hyatt Erawan Bangkok last year. There may be scope for upside to our earnings model from bigger asset sales to ERWPF than assumed (a net gain of Bt800m under our best-case scenario).

Recommendation

ERW will post the best FY13 profit growth in the sector. Once it receives the proceeds from asset sales in April, the firm plans to adopt a new business model—we expect the unveiling of the new business model to generate greater investor interest in the stock. Huge gains from asset sales to the property fund will make ERW the best dividend play in the sector for FY13 (at 2.1%). Its core FY13 PEG (excluding gains from asset sales to ERWPF) is only 0.4x. A valuation re-rating is deserved, we believe. ERW's earnings turnaround story is not yet fully priced in. Our YE13 target price remains Bt7.0, a 10% discount to DCF value BUY!