PPHE Hotel Group’s book value appeal
PPHE Hotel Group has seen its share price weaken recently on the back of mixed interim results. Revenue in the first half of 2016 increased by 9.2% to £111.6m but EBITDA profit fell 7.4% to £32.5m. The shares remain at a large discount to the market value of assets and the P/E rating for 2017 is modest.
The hotel sector is cyclical with tourist and business demand driven by economic growth and consumer confidence. As a consequence there tends to be significant investment in new hotels just before an economic downturn.
The bulk of hotel businesses also rely on debt financing given the capital-intensive nature of the business. This backdrop makes for volatile share prices with PPHE Hotel Group’ shares plunging from 540p in 2007 to 12.5p in late 2008.
PPHE’s three hotel brands
Source: PPHE Hotel Group
PPHE group has recovered from the global financial crisis but trading in the first half of 2016 was mixed. Like-for-like occupancy rates fell to 70.8% from 75% last year while like-for-like average room rates improved by 6.3% to £103.5.
The net result was that the like-for-like revenue per available room (RevPAR) edged up by 0.3% to £73.2. However, reported revenue per available room fell 16% in the first half versus only a 1.7% in the first quarter.
A new hotel opening in Q2 did have a negative impact on the like-for-like figures but there still appears to have been an underlying slowdown. The outlook for the full year is mixed with terrorist events set to curtail European travel.
PPHE Group first half trading result
Source: PPHE Group investor presentation
Divisional performance: UK weakness hits EBITDA profit
The United Kingdom is the most important market for PPHE Hotel Group and as such the reporting currency has been changed to sterling. The UK experienced trading weakness in the first half with revenue down 3.1% to £66.4m.
Revenue per available room (RevPAR) fell by 4.7% to £109 in H1 2016, on a year ago, with a higher average room rate failing to offset a fall in occupancy. EBITDA profit generated in the UK fell by 13.8% on a year ago to £21m.
The Netherlands saw revenue increase by 12.7% to £23.2m while EBITDA profit improved by 16.3% to £7.4m. RevPar increased by 13.2% to £83.5 as both room occupancy and the average room rate improved.
Revenue in Germany and Hungary increased by 2.4% to £10.6m while RevPAR fell by 0.6% to £41.2. The weaker trading figures meant that EBITDA profit, in Germany and Hungary, fell by 1.6% to £2.7m.
The Croatian business is now consolidated, following an increased investment, and saw a 10.3% revenue improvement to £9.6m. Despite an 11.1% increase in RevPAR the business saw no change in EBITDA profit at £1.5m.
Clearly the main driver of the fall in first half EBITDA at PPHE Hotel Group was a poor result in the UK. The company highlighted increased global terrorism activity and the anticipation of the Brexit referendum as two headwinds.
These factors reduced demand for hotel accommodation in greater London while room supply in the capital also increased. PPHE therefore saw its occupancy rate in the UK fall to 81.7% in the first half of 2016 versus 86.9% a year ago.
Mixed trading has seen PPHE Hotel Group’s share price weaken
Market net asset value
While recent trading has been mixed the company has completed a significant refinancing programme. Lenders have therefore undertaken valuation appraisals of PPHE’s hotels, which have highlighted the group’s hidden asset value.
At 30 June 2016 the book value of property, plant and equipment at PPHE Hotel Group was £1.025bn. However, the fair value of assets has been assessed at £1.47bn implying a £445m, or 43%, fair value uplift.
Source: PPHE Hotel Group interim financial results
The interim accounts assign PPHE Hotel group an equity book value of £339m before a £42.2m special dividend was paid. Netting off the payment and £25.3m of goodwill and the tangible book value of equity comes to £271.5m.
If we add back the £445m fair value uplift on hotel assets the market book value of equity becomes £716.3m or around £17 a share. This compares to the company’s current market value of £295m and a share price of around £7.
The shares are therefore trading at a 59% discount to the market value of tangible assets. It is also worth noting that the hotel development assets are valued at cost and will see a valuation uplift upon completion.
PPHE Hotel Group’s hotel pipeline will deliver three new hotels in 2016 and an extension and reconfiguration project. The four projects will help to boost the market value of assets and PPHE Hotel Group’s earnings power in 2017.
One of the new hotels, at Nuremberg in Germany, has already been opened while two new London hotels are set to open in Q4. The extension and reconfiguration project at Park Plaza Riverbank, London, will also complete in Q4.
Park Plaza Riverbank (London): extension and reconfiguration project
Source: PPHE Hotel Group
The two new London hotels set to open in 2016 are the Park Plaza London Park Royal in Zone 3 and Park Plaza Waterloo in Zone 1. Looking out to 2019 and two new art’otel brand hotel openings are planned for London.
PPHE’s hotel development pipeline: four new openings in 2016
Source: PPHE Hotel Group investor presentation
Summary and valuation
PPHE Hotel Group’s trading result in the first half of 2016 was mixed with a poor result in the UK leading to a decline in EBITDA profit. The impact of the June referendum is unclear but a decline in the pound should boost UK tourism.
PPHE Hotel Group’s forecast P/E for 2016 is 14.1X with analysts having recently pared back their earning estimates. However, the group will realize the full impact of new hotels next year and as such the forecast P/E for 2017 is 9.5X.
In 2018 the forecast P/E falls to 9X and in 2019 the group will benefit from two new hotel openings in London. We estimate that over half of PPHE’s profits are currently generated from London, which is a diversified and global city.
While the near-term earnings multiples are low it is the value of assets that makes the shares stand out. The market value of tangible assets equates to £17 per share and will see a further uplift when hotel projects reach completion.
The key risk for investors in PPHE Hotel Group is that London experiences a major downturn. While this is certainly possible, given the Brexit vote, the cultural and economic appeal of the UK capital should ensure its long-term success.
Disclosure: Interests associated with Fat Prophets declare a holding in PPHE Hotel Group.