Shares in PPHE Hotel Group have risen 16-fold since the nadir of the 2009 financial crisis, making them one of the best performers on the whole of the London market over that time. They have also gained 45% in 2015 alone, driven by strong trading from the firm’s European hotels, as well as a strengthening of the pound against the euro boosting gains from its UK assets. But with the shares still offering a useful yield, the company having ambitious expansion plans and there being significant “hidden value” on the balance sheet, I believe that there could be further gains to come.
The Business
PPHE Hotel Group (PPH), previously known as Park Plaza Hotels, is an operator and owner of four-star hotels located in major cities and destinations in Europe. Under an exclusive licence from hospitality giant Carlson the firm has the rights to develop and operate the Park Plaza brand in Europe, the Middle East and Africa. Second major brand art’otel is fully owned by the group, with PPHE also having a minority interest in the Arenaturist group, one of Croatia’s leading hospitality companies.
With nine hotels and nearly 2,800 rooms in operation the UK is the firm’s main market, contributing almost two-thirds of revenues in the 2014 financial year. The Netherlands, Germany and Croatia are the company’s other major countries of operation, with Hungary and Israel making a minor contribution. Flagship assets include the Park Plazas at Westminster Bridge and Victoria in London, as well as the art’otel in Amsterdam.
As I write the company has a total portfolio of 38 hotels, with more than 8,300 rooms available. However, a €200 million, fully financed investment programme provides significant growth potential for the medium- to long-term. Planned developments, including a new hotel near London Waterloo and an art’otel in Hoxton, are expected to add over 1,000 rooms by the end of 2016 and another 352 by the end of 2019.
Recent Trading
Highlights of the 2014 financial year included revenues rising by 10.5% to €270.4 million, boosted by revenue per available room rising by 12% and the strengthening of sterling against the euro. (The firm reports its results in euros so a strengthening pound provides a boost on translation of the numbers.) Normalised profit before tax grew by 50.4% to €32.9 million and this prompted a 35.7% hike in the dividend to 19p per share.
Last week PPHE confirmed that the strong performance had continued in the six months to June 2015, with trading being ahead of expectations. This was due to higher occupancy and room rates across the Netherlands, Germany and Hungary driving revenues by approximately 9%. While the UK hotels only grew revenues by 1%, the strength of sterling against the euro equated to a 14% rise translated into euros. Overall, revenues for the first half are forecast to be up by around 12% at around €140 million, with margins and profits also higher. Into the second half and a continuation of the above trends, along with a delay of planned refurbishment works into 2016, is expected to see trading ahead of previous expectations.
Analysis
Shares in PPHE Hotel Group currently trade at an all time high of 650p.
While trading is going well at present I note that the firm remains exposed to the traditional hotel industry risks, including exposure to the performance of the global economy, high levels of competition and terrorism affecting consumer confidence. We are also mindful that while the recent strength of sterling has been beneficial for the company, it could negatively affect demand at the UK hotels, and especially those in London. And while the current development plans provide good long-term upside potential several refurbishment projects planned for later this year and in 2016 will have an impact on short-term income.
Nevertheless, what stands out about the investment case is the significant “hidden value” in the balance sheet.
My base case net asset value (NAV) calculation is as follows:
– NAV as at 31st December 2014 = €323.87 million. Less intangibles of €32.59 million = €291.28 million.
– Net income for the six months to June 2015 = at least €7.7 million.
– “Fair value upside” – Property, plant and equipment (PPE) is measured on the balance sheet at cost, less accumulated depreciation and impairment losses. This is a highly conservative accounting method. In contrast, “fair value” represents the last independent valuations carried out on properties – either for the firm’s 2011 prospectus issued for its move from AIM to the Main Market, or for bank lending purposes.
The 2014 annual report states that the loan to value ratio of bank borrowings to the fair value of the group’s properties using the latest market valuations was approximately 56%. With bank borrowings of €554.77 million as at 31st December this implies a total property portfolio valuation of €990.66 million. Less the PPE net book value of €823 million this implies “fair value upside “of €167.66 million.
Total = €466.64 million
Divided by the current GBP/EUR exchange rate of 1.4085 = £331.3 million or 790p per share, which implies 22% upside if the firm were trading at parity with NAV.
Further NAV upside potential comes from the conservative first half net income forecast, no value being given to intangibles and upside from development projects. Also, with the London assets being valued in sterling, further currency translation upside comes from sterling having risen by 9.4% against the euro since the last balance sheet date.
Assessment
As well as the potential NAV upside, according to forecasts from analysts at Hardman the shares are trading on a reasonable looking earnings multiple of 12.3 times for 2015. PPHE has additional income attractions, currently offering a historic dividend yield of 2.92%. With a progressive dividend policy in place and the payment being covered almost 3 times by earnings, I see decent scope for further increases. I also note recent reports from the Sunday Times which suggests that Holiday Inn owner Intercontinental is on the search for potential acquisition targets.
Ahead of the interim results due on 27th August (when the latest NAV figure will be revealed) I believe that the shares fit well into a long-term buy & hold strategy.