Higher than expected costs and delayed openings suggest that our EBITDA forecasts may now be met only thanks to consolidation of PPHE’s Croatian resort businesses. However, despite continued headwinds there is reassurance that assumed like-for-like EBITDA shortfall, notably in London, is partly related to current transformative investment (consolidated rooms to rise this year by c 70%), with full pay-off from 2018. Robust finances are evident in the recent special dividend of 100p/share and successful property refinancings, which underline substantial hidden reserves (‘fair value’ adjustment of c 1,000p/share to reported 803p NAV).
The half year to 30 June saw contrasting fortunes for PPHE’s two main profit sources, London and the Netherlands, as well as consolidation from April of operations in Croatia after buying in its joint venture. There were also significant corporate transaction costs, which we assume to have accounted for much of the overall £2.6m (7%) decline in EBITDA. While London trading was predictably subdued (-5% RevPAR was in line with market reports for the capital), the focus on room rate (+1%) could not prevent cost pressures (eg selling and payroll) driving UK EBITDA down 14%. Netherlands again stole the show with RevPAR up 5% on a demanding comparative and EBITDA up 16%, albeit currency-boosted. Croatia’s initial EBITDA contribution was understandably minor as Q2 is its shoulder period.
The changes to our forecasts, detailed on page 2, reflect the Croatia deal, newlyannounced delay in London openings and our fresh caution about cost control. For 2016, while we assume H2 stabilisation in London (July’s sharp market pick-up was exceptional), EBITDA margin reduction on a par with H1 looks reasonable. The delay to late Q4 in opening two hotels and the Riverbank extension brings preopening costs without associated revenue. However, this EBITDA shortfall should be made good by Croatia’s seasonally stronger half. For next year, the profit driver remains the new c 900 rooms in London since costs may be expected to remain an issue and first inclusion of loss-making Q1 will depress Croatia.
Despite disappointment that PPHE’s longstanding prized assets in London may have gone off the boil, we believe this to be temporary and there should be material payoff from expansion. At 8.7x 2017e EV/EBITDA, PPHE’s valuation is on a par with European hotel peers and at a discount to reported NAV, let alone fair value.