PPHE Hotel Group bounces back
The hotel industry is cyclical with room rates and occupancy levels falling back in a downturn. New hotel supply exacerbates this trend with hotel completions picking up just as a recession takes hold. We are now in the upturn of the cycle and as such PPHE Hotel Group is reaping the rewards.
Companies with cyclical demand and financial leverage have vulnerable business models. This has proven to be the case for a number of banks, real estate developers and ship owners in the post 2008 downturn.
The hotel sector is cyclical with room demand driven by underlying economic conditions. The key metric followed by the industry is revenue per available room (RevPar) which is driven by occupancy and room rates.
Taking the US hotel industry as case study and RevPar fell back in 2008 and 2009. This was exacerbated by strong annual new hotel supply being delivered in both of those years due to strong hotel construction started before the downturn.
US Hotel industry case study: Demand/Supply and RevPar
Source: Hilton Worldwide investor presentation
PPHE Hotel Group has seen similar trends with hotel occupancy falling from 82.4% in 2007 to 79.1% in 2009. Room rates fell from €118.8m in 2007 to €97.8 in 2009 and as such RevPar was down from €97 in 2007 to €77.4 in 2009.
The effect on revenue was that it fell back from €97m in 2007 to €80.3m in 2009 while EBITDA profits fell from €28.4m in 2007 to €16.2m in 2009. Net debt, meanwhile, rose from €86.5m at the end of 2007 to €403.9m at the end of 2009.
Against this backdrop it is understandable that the shares fell back from over 500p in 2007 to less than 50p in 2008. Operating conditions, revenue and profits have been on an improving trend since 2009 and the shares have rebounded.
PPHE Hotel Group’s share price slump and rebound
PPHE in focus
PPHE Hotel group is majority controlled by its founders Mr Eli Papouchado (77) and Mr Boris Ivesha (69) which makes the shares illiquid. Mr Papoucahdo is the non-Executive Chairman and Mr Ivesha is the President & CEO.
Both executives have a long history in the hotel industry and have been with PPHE Hotel Group for decades. New blood is now coming through in the form of Deputy CEO and CFO Chen Moravsky (44).
In 2014 the UK generated two-thirds of PPHE Hotel Group’s revenue and 68% of EBITDA. The Netherlands, Germany and the Management & Holdings were the other profit drivers for the group.
PPHE Hotel Group EBITDA profit contributions
Source: PPHE Hotel Group investor presentation
In terms of the hotel profile and the March 2015 presentation lists 38 hotels in 6 countries with 8,338 rooms. There are 1,375 rooms in development and as such meaningful growth set to come in the medium-term.
The bulk of the hotel pipeline is in the UK at 1,198 rooms with the remaining 177 rooms in Germany. As such the focus of the business on the UK with London the main target for expansion in the country.
The key hotel brand is Park Plaza with PPHE having an exclusive perpetual license from Carlson to operate the brand in EMEA (Europe, Middle East & Africa). The other brands are art’otel (contemporary hotels) and Arenturist (holiday hotels).
Source: PPHE investor presentation
Recent trading
Trading conditions have been on the up recently with hotel occupancy at 83.7% in 2014 versus 80.7% in 2013. The first half of 2015 saw occupancy increase to 82.9% versus 80.3% in the first half of 2014.
Room rates have also been improving and as such revenue and bottom line profits are both improving. In 2014 revenue rose by 10.5% to €270.4m and EBITDA increased by 14.6% to €94.8m.
In the first half of 2015 the group saw a similar performance with revenue up 12.4% to €141m and EBITDA up 21.9% to €48.4m. Part of the increase, though, has been driven by the strength of sterling against the euro.
Valuation
PPHE’s equity, or book value, came to €349.2m at June 2015 or around £253m at current exchange rates. This compares to the current to the current market value at £277m and as such the shares are at around a 10% premium to book.
However, the value of the hotel assets is likely to be underestimated and as such PPHE Hotel Group looks attractive as an asset play. This is because Property is on the balance sheet at cost (minus depreciation) and not market value.
The 2014 annual reported stated that the ratio of bank borrowings to the estimated market value of properties was 56%. This implies a tangible net asset per share at over £8 if the property portfolio was valued at the market price.
PPHE financial position at end 2014
Source: PPHE Annual Report
Bank borrowings at the end of 2014 came in at €554.8m which implies that the market value of properties, plant and equipment at €990.66m. This is ahead of the €823m book value of property, plant and equipment at the end of 2014.
If we add the difference of €167.7m to the June book value at €349.2m, and deduct €31.2m of intangibles, we get €485.7m/£352m. Using the latest share count of 41.8m shares this comes to 842p net tangible assets per share.
The forecast P/E ratio is also modest at for 10X 2015, 9.5X 2016 and 8.7X for 2017. The forecast dividend yield is also attractive at 2.6% for 2015 and increasing to 2.8% in 2016 with both payments more than 3.5X covered.
Summary
PPHE Hotel Group appears to be well placed given the upturn in the UK and the Eurozone. Much of the new hotel room pipeline is in London and in the Eurozone the hotel portfolio has recently seen an improvement in occupancy rates.
Financial leverage is still high with gearing at 58.1% at the end of 2014 but this was down from 60.8% at the start of the year. Net debt at mid-2015 came in at €535.9m and gearing at 59.3% using the book value of properties.
The level of financial leverage is high but the company has become more diversified and has strong asset backing. Certainly management has shown confidence by increasing the 2014 full year dividend by 36% to 19p.
This report was produced by Fat Prophets Senior Research Analyst, Andrew Latto