PPHE has delivered on a confident post-close update with 2016 EBITDA well above expectations. H2 recovery in London despite headwinds and sustained buoyancy in newly consolidated Croatia made up for H1 disappointment, which is all the more encouraging as these are likely to be the company’s medium-term profit drivers. Valuation is low in terms of EV/EBITDA and at a glaring discount to real asset value (‘fair value’ adjustment of c 1,000p/share to reported 782p NAV will only increase on inclusion of new high-value estate).
After August’s profit warning (higher than expected costs and delayed openings), PPHE’s second half performance makes good reading. London, its largest profit centre, looks to have clearly outperformed the market by almost recovering its H1 RevPAR shortfall (we estimate 5%), thereby mitigating severe cost pressures to deliver maintained EBITDA. In Croatia 11% rate-led revenue gain in its key trading period contributed to pro forma constant currency EBITDA up 8%. External factors were also favourable, notably foreign exchange, reclassification of pre-opening costs as exceptional and a one-off €1m lower incentive rent in Germany as well as delays to the openings of Waterloo and Park Royal, which curbed trading losses. Predictably, Netherlands softened (RevPAR -5%) after a strong H1, partly because sterling weakness depressed Amsterdam’s key feeder market from the UK.
Our confidence in more of the same underpins our current-year upgrade (details on page 2). In London costs remain an issue but there is reassurance in the benefit of a weaker pound on inbound tourism and staycations as well as certain major sporting events. Security and geopolitical concerns apart, PWC forecasts RevPAR growth of c 3% this year and next. We are now also more positive about Croatia where strong demand and investment should broadly maintain 2017 EBITDA (albeit currency assisted) despite first inclusion of its off-season Q1 (estimated £3m loss). In contrast, we are lowering our forecast boost from c 900 new rooms in London as Waterloo is not fully open until H2 and Park Royal’s soft opening is delayed to Q2.
PPHE’s 2018e EV/EBITDA rating of 8.4x appears below the average (8.9x) of European branded peers. Fair value adjustment of £439m, as reported at December 2016, results in an adjusted NAV of c £18.20 per share with a further material uplift expected as the new London hotels come on stream.