The trading update, following the update on 12 March 2020, highlights the expected drop in demand due to the COVID-19 virus, and strong actions by management to cut costs and preserve cash in the uncertain environment. We leave our forecasts unchanged following our recent downgrade of EBITDA for FY20e by 14%, but now assume no dividend payment in FY20, following the cut of the proposed final dividend for FY19 of 20p. The shares are trading at a discount of 68% to the EPRA NAV, and the majority of the hotels are freehold assets.
As expected, PPHE has seen an increase in cancellations and a significant slowdown in future bookings. In response, it is aggressively cutting costs by reducing capacity in Germany and Hungary (7% of FY19 EBITDA); temporarily closing two hotels in Amsterdam and reducing capacity elsewhere (12% of FY19 EBITDA), potentially closing 2,000 rooms in London (from c 3,700 rooms in the UK) temporarily (58% of FY19 EBITDA); reducing staff costs (46% of operating costs ex depreciation, amortisation and rent in FY19); and stopping payment of the final dividend for FY19 (a cash saving of c £8.5m). Many governments have committed to subsidising a significant portion of operating costs. In addition, the company has options to change the phasing of future investment. There are no comments on Croatia, which is more geared to summer travel.
We leave our forecasts unchanged following our 12 March update note, in which we downgraded EBITDA for FY20 by 14%. Our assumption that occupancy reduces by 10pp in FY20 is equivalent to a 100% closure for one month, but the partial closures indicated by management above would suggest that occupancy reductions may be lower but for longer. We assumed a 30–40% drop-through of lost revenue to EBITDA, but the aggressive cost cutting and new government support to subsidise operating costs will mitigate margin downside. We now cautiously assume no dividend will be paid for FY20.
At 820p, the shares trade at a discount of 68% to the EPRA NAV of £25.46 at 31 December 2019. On our maintained forecasts, the EV/EBITDA multiples for FY20e and FY21e are 8.8x and 7.9x, respectively. The average EV/EBITDA multiple has been 8.2x since FY10.