Amid heightened concern about European travel uncertainties, PPHE continues to please. Its notably upbeat outlook comment complemented 2015 EBITDA well ahead of expectations and a clear pointer to substantial hidden reserves (management’s indicative ‘fair value’ adjustment on book value properties of c £8.90 per share). There was reassurance in confirmation of momentum and justifiable enthusiasm about transformative investment (over 1,000 new rooms this year with abundant opportunity at attractive funding rates). Despite recent price strength, PPHE’s valuation is low in terms of EV/EBITDA and at a marked discount to real asset value.
H215 constant currency EBITDA gains of 6% and 15% in the UK and the Netherlands were all the more impressive, given a tough comparative in Q4, the company’s busiest quarter, and the Paris attacks. Inevitably, as the largest profit source, London led the way, with estimated 1% higher rate-led RevPAR allowing good profit conversion, but the Netherlands exceeded even H1 buoyancy with its yield up 16% driven by corporate demand and the success of its flagship art’otel amsterdam. Provincial UK again traded well, whereas Germany and Hungary was still mixed (H214 EBITDA was flattered by c €1m one-off tax settlement).
Our financials are now in sterling in line with the company’s change of reporting currency from euro to reflect the importance of UK earnings. Security and geopolitical developments are necessarily a concern, with the Brussels attacks compounding uncertainty. However, management’s 2016 expectation of flat rates in London seems duly cautious and trading there has held up, albeit in the quietest quarter. 2016 will be notable for London expansion with two openings and an extension (total 890 rooms); our forecasts, detailed on page 2, reflect likely contrasting profit maturities with leverage benefits from adding to a successful unit offsetting start-up costs. We show accelerating payoff in 2017, not least from its unique ability to offer 1000 rooms in one area for events in central London.
Despite recent outperformance, at 7.6x 2017e EV/EBITDA, PPHE’s valuation is still similar to the average for branded European peers. While the gap between market cap and reported NAV (638p) has closed, there is strong asset appeal in the discount to ‘fair value,’ which management estimates at €507m at end 2015. Borrowings are well within long-term facilities and a loan-to-value requirement of up to 65%.