PPHE, the asset-backed, London-focused hotel operator, has announced its preliminary results which have beaten our and market expectations. The company continues to deliver a strong performance from existing operations while at the same time developing its portfolio for future earnings and asset growth. The current year is set to be one of consolidation, as a number of new developments open, and we expect 2017 to see an acceleration in earnings growth and cash generation. The shares trade at a significant discount to prospective book value as adjusted for the real value of the assets.
The group benefited from a strong London hotel market, at least till the last weeks of the year, and from the strength of sterling vs the Euro. Neither will be as much help this year, with the Euro Sterling rate difficult to forecast but expected to be a drag on reported performance.
We are assuming that the Euro and a less buoyant hotel market will mean growth will be limited this year, but as the new openings start to contribute, there should be an acceleration in earnings and cash flowsinto 2017. Average growth over the two years should be above peers.
Although we anticipate strong growth in earnings, asset values and cash flows, valuation on most metrics remains at a discount to most peers, and out of line with the past and forecast performance. The share price performance has been good, but is lagging the operational delivery.
The main risks are the London hotel market and the balance sheet which isindebted, although the company is well within all covenants and hasthe ability to trade out of assets and reduce balance sheet indebtedness quickly. Management understandably prefer to retain assets, given current low rates.
PPHE has an outstanding track record and a highly visible development pipeline which will further increase the real asset value. Land Securities et al are currently trading at discounts of 20-30%, but the asset values here are growing much faster thanks to the development pipeline and the stock is cheap on earnings grounds also. The shares continue to look lower rated than peers yet growing faster.