PPHE, the asset-backed, London-focused hotel operator, has published a strong set of 2015 interim results, as prefaced in its recent unscheduled trading statement. The company looks indebted relative to income, but this reflects a major development pipeline in progress, where the assets have yet to contribute income, while the shares trade at a substantial discount to book value as adjusted for the real value of the assets.
Interim results beat expectations prior to the trading statement. Revenues of €141m easily surpassed our €134m estimate and EBITDA of €48.4m was similarly better than our €45.8m estimate. Underlying revenue growth of 4% was boosted to a reported 12% by the weakness of the Euro (translating £ sales).
Reported debt rose partly because of the translation of sterling debt into weaker Euros and reflecting the significant pipeline of new developments. Debt will continue to rise as the build out continues, but will remain within facilities and within conservative loan to value parameters.
The valuation looks modest, especially in the context of the real value of the assets which we believe are significantly above book value. On P/E and EV/EBVITDA, the group continues to trade at a significant discount to sector majors in spite of a better growth pipeline.
Some investors consider the group’s drawbacks to be an apparent high debt level relative to current income, limited liquidity, and a founder controlled business. In fact, the founders have delivered strong growth and are reluctant to issue equity at a discount, and the debt is readily manageable.
PPHE has extremely strong asset backing and the statement alluded to a crystallisation of value. Unlike a property company which revalues each year, the real value of the hotel estate is somewhat hard to track, and we believe that management intend to highlight this hidden value to the market by means of a sale and leaseback or similar. Such a move could be very helpful to the share price.