PPHE’s 2016 interim results disappointed the market, as construction delays will affect 2016 profitability. The key point for long term investors is that, although the loss of profits and cash flow is disappointing, the business outlook for 2017 and on is unaffected, while property values are above expectations. Our forecasts for 2016 and 2017 are reduced for this and other reasons. The shares trade at a significant discount to book value as adjusted for the real value of the assets, and this value will be further boosted when the new hotels open, and we expect the discount to narrow.
Interim results were slightly mixed vs expectations with corporate costs hitting the result, and a slightly softer market in the UK. Later new openings will be a drag but this is offset by a better forecast than expected from the Croatian acquisition.
We have shaved EBITDA forecasts, and the composition is more Croatia, less UK and higher corporate costs, mainly for one off transactions. Weaker sterling should help the H2 results, but opening delays will be a drag in 2016, and possibly into early 2017.
On most metrics, the group remains at a significant discount to peers, and out of line with the past and forecast performance. At the interims, the group reported the latest property valuation, and the adjusted book value is now pro-forma c.£17/share on our estimates.
The main risks are the London hotel market, and new openings; although the balance sheet isindebted, the company has now extended the average debt maturity to 9 years which gives it a more solid balance sheet structure. As a major property owner, we expect some level of gearing.
PPHE has an outstanding track record and a visible development pipeline which will further increase the real asset value, beyond the existing substantial premium to the currents share price. UK property stocks are currently trading at discountsto book, butthe asset values here are growing much faster and the discount is unrealistic. The shares continue to look lower rated than peers, yet growing faster.