PPHE Hotel Group — Update 12 December 2016

PPHE Hotel Group (LN: PPH)

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1,070.00

0.00 (0.00%)

Market capitalisation

455m

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Research: Consumer

PPHE Hotel Group — Update 12 December 2016

PPHE Hotel Group

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PPHE Hotel Group

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Company update

Travel & leisure

12 December 2016

Price

682p

Market cap

£288m

Net debt (£m) at June 2016

531.6

Shares in issue

42.2m

Free float

37%

Code

PPH

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

0.5

(12.8)

3.6

Rel (local)

4.1

(12.3)

(3.9)

52-week high/low

849.0p

598.5p

Business description

PPHE Hotel Group (formerly Park Plaza Hotels) is an integrated owner and operator of four-star, boutique and deluxe hotels in gateway cities, regional centres and select resort destinations, predominantly in Europe.

Next events

2016 results

March 2017

Analysts

Richard Finch

+44 (0)20 3077 5700

Paul Hickman

+44 (0)20 3681 2501

PPHE Hotel Group is a research client of Edison Investment Research Limited

Transformative investment is set increasingly to benefit PPHE. While consolidation of its Croatian resort businesses is already paying off (double-digit rise in room rate in Q3), imminent expansion in London (c 900 rooms) and extensive renovations should bring a step change in growth opportunity. Meanwhile, PPHE’s Q3 trading update expressed confidence it should continue to brave headwinds to meet its 2016 results expectations. Strong finances are evident in August’s special dividend of 100p/share and successful hotel refinancings, which underline substantial hidden reserves (‘fair value’ adjustment of c 1,000p/share to reported 803p NAV).

Year
end

Revenue (£m)

EBITDA
(£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

EV/EBITDA
(x)

12/14

217.0

76.1

28.6

68.9

19.0

8.7

12/15

218.7

80.1

31.8

76.1

20.0

8.6

12/16e

266.0

85.0

23.5

51.1

20.0**

10.2

12/17e

318.0

98.0

28.5

63.3

21.0

8.6

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments. **Plus 100p special dividend paid Aug 2016.

Q316 reassurance and our forecasts maintained

After news at H1 of higher than expected costs and delayed openings, confirmation of a “good” Q3 is welcome. 9% higher like-for-like revenue quarter-on-quarter was driven by Croatia, but positively, given market softness (flat RevPAR, per STR) and its significance to PPHE, London held up well. For H2, assuming a stable market in the capital (October’s sharp decline was exceptional), we expect an EBITDA margin reduction there on a par with H1 in the face of continued cost pressures. The expected year-on-year H2 EBITDA impact from this and the delay to late Q4 in opening two hotels and the Riverbank extension (pre-opening costs without associated revenue) should be offset by first inclusion of Croatia’s seasonally stronger half.

Material pay-off in 2017 and beyond

For next year, the profit driver remains the new rooms in London since costs may be expected still to be an issue and the first inclusion of loss-making Q1 will depress Croatia. The returns from the projected £115m development spend included in our forecasts may accrue in full only beyond the scope of this review.

New growth initiative in Croatia

The proposed development of Arenaturist, PPHE’s listed Croatian investment, into a “substantial Central and Eastern European leisure and hospitality company” is a potentially exciting complement to PPHE’s proven focus on full-service “affordable luxury” hotels with a good geographic and guest mix in European gateway cities.

Valuation: Asset-rich

We think PPHE’s glaring discount (63%) to “fair value” NAV is undeserved, given its record of asset appreciation, and will only accentuate on inclusion of new high-value London estate. Similarly, PPHE’s 8.6x 2017e EV/EBITDA compares well with European hotel peers and even more so as investment starts to pay off.

Investment summary

Company description: Affordable luxury hotel operator

PPHE is an owner and operator of full-service, four-star, deluxe and boutique hotels in gateway cities, regional centres and select resort destinations, predominantly in Europe. Its portfolio comprises 25 hotels (c 5,500 rooms), marketed under the brands Park Plaza Hotels & Resorts (exclusive partnership with Carlson Hotels Worldwide in EMEA) and art’otel (owned). It is also majority owner of Arenaturist, a leading Croatian hospitality group (c 2,800 rooms). Current development projects are primarily in London with the opening of c 900 rooms by the end of this year and c 500 rooms in 2019. PPHE was floated on AIM in 2007 on its formation from a combination of the hotel assets of its two largest shareholders and moved to the Official List of the London Stock Exchange in 2011.

Valuation

In terms of the key EV/EBITDA indicator, PPHE, at under 9x 2017e, appears inexpensive. However, differing business models among competitors, eg the increasing popularity of “asset-light” and associated low indebtedness, and geographical coverage do not make for easy comparison. In any case some discount is justified in view of PPHE’s relatively brief record, its scale of net debt (albeit well within facility) and the presence of effectively a majority shareholder with a history of related-party transactions. We look rather at the very substantial share price discount to “fair value” NAV (c 63%) or 14% to book value (both as reported at 30 June 2016).

Sensitivities

Cyclical business and heavily dependent on the global economy.

External events such as terrorism mitigated by recovery potential and guest mix.

Material control. Related-party transactions, mitigated by strict governance, with a record of success.

Largely fixed cost base, tempered by effective yield management and implementation of as flexible a business model as possible.

Financing risk, mitigated by loan-to-value policy/banks’ support and successful refinancings.

Foreign exchange exposure.

Dependence on brand perception.

Reliance on relationship with Carlson but termination very unlikely.

Financials

Our estimated 2016 net debt of £579m is well within the company’s long-term bank facilities of about £690m, which mature substantially in 2026-28. With regard to expansion, PPHE has a well-established policy and track record of borrowing within a 65% loan-to-value requirement of its banks. For example, the recent refinancings of two London and six Netherlands hotels implied an asset value at least £130m ahead of their book value at December 2015. Management is confident that it can leverage on its assets by opening similar facilities for future development projects.

The company seeks to reduce the seasonality of its business by optimising its guest mix (particularly business against leisure) and its impact on profit by securing as flexible a cost base as possible. It also enjoys substantial recurrent revenue through agreements with business travel agencies and large corporates for discounted room rates.

Company description: Affordable luxury hotel operator

Gateway focus

PPHE has developed a collection of popular, full-service, four-star, deluxe and boutique hotels with a good geographic spread and guest mix (c 50% business customers). With a focus on European cities (gateway and regional), there is particular representation in the important lodging markets of London, Amsterdam and Berlin, where the hotels are predominantly owned and operated under the Park Plaza brand. The advent of Westminster Bridge in 2010 brought a step-change not only in company financials but in commercial and marketing opportunity as its flagship is one of Europe’s leading conference hotels (currently top in London by “Popularity”, per TripAdvisor). Consolidation of resort activities in Croatia brings a re-shaping in terms of business and seasonality.

Exhibit 1: Portfolio (wholly owned and Park Plaza unless stated otherwise

TripAdvisor ranking

Rooms

UK

London:

(out of 1,080)

Westminster Bridge*

184

1,019

Riverbank

369

395

Plaza on the River

159

66

Victoria

226

299

Sherlock Holmes

302

119

County Hall (managed)

178

399

Leeds and Nottingham

365

Cardiff (franchised)

129

Total

2,791

Netherlands

Amsterdam:

(out of 361)

Victoria

134

306

Vondelpark

174

138

art’otel

26

107

Airport

116

342

Utrecht

120

Eindhoven

104

Total

1,117

Croatia**

Arenaturist: 13 hotels / holiday apartment complexes of which 4 branded Park Plaza (1,370 rooms)

2,818

Germany and Hungary

Berlin:

(out of 662)

Wallstreet Mitte (leased)

95

167

art’otel kudamm (leased)***

197

152

Kudamm (joint venture)

167

133

art’otel mitte (joint venture)

115

109

Cologne***, Dresden and Budapest (art’otel) (leased)

557

Nuremberg

177

Trier (franchised)

150

Total

1,445

Israel

Tel Aviv (franchised)

203

Total

8,374

Source: PPHE Hotel Group. Note: *100% of voting rights/assuming continued control of sold rooms. **66% owned. ***Proposed freehold acquisition by Arenaturist.

Flexible model

The breadth of ownership interests and contractual arrangements in PPHE’s hotels allows the company to maximise opportunities from the varied markets in which it operates and may enter. As shown in Exhibit 1, ownership accounts for about 80% of room stock and almost all UK and Netherlands operations. It also applies to all but one of the company’s current projects (c 1,400 rooms). Although it is capital intensive, ownership offers scope for asset appreciation, especially in key gateway cities in Europe, and management has a strong record in real estate development and a self-professed entrepreneurial spirit. Most PPHE hotels in Germany and Hungary are under long-term operating leases (15 to 25 years), while the sole management contract (Park Plaza County Hall) runs until 2033. Franchise arrangements cover just 6% of overall room stock (three hotels); revenue comes from brand royalty or licensing fees (c 3.5% of hotel revenues), one-off fees on opening under the company’s brands and ancillary services.

Fully branded

Apart from several Croatian resort properties that use the well-known Arenaturist brand, all hotels are branded Park Plaza & Resorts (c 75% of rooms) or art’otel. While distinct in terms of target customers and property size (the former targets the business as well as leisure market and favours larger properties, ie typically up to 300 rooms), both brands address the growing “affordable luxury” segment (high quality at attractive rates). Outside Europe, the Middle East and Africa, where the company holds an exclusive right to use the brand in perpetuity under its agreement with Carlson, there are 20 Park Plaza properties in operation and under development, predominantly in China and India.

art’otel is an established “lifestyle” brand, targeting those with an interest in art and culture by aspiring to be represented at key cultural hot-spots throughout Europe. In keeping with a new social environment and desire for differentiation, such “lifestyle” hotels are increasingly seen as an attractive and strategic market by most hotel groups. For example, AccorHotels has newly suggested that the market may double over the next three to five years and has thus committed 10% of its pipeline against 1% previously. At art’otel, contemporary architectural styling is married with art-inspired interiors (each property is dedicated to a particular artist, eg Warhol at berlin kudamm). Amsterdam, only the second development since PPHE’s acquisition of the brand in 2007, opened in 2013 to wide acclaim, with sites in London (Hoxton and Battersea Power Station) due to open in 2019. While ownership of the brand is subject to a perpetual licence in favour of the brand founder elsewhere in Europe (France, Germany, Italy, Spain, Austria and Switzerland), there is reassurance that any such hotel will be managed by the group.

Powerful relationship with Carlson

Inclusion in the reservation and distribution systems of Carlson Rezidor Hotel Group (the marketing and purchasing alliance between Carlson, one of the largest hospitality and travel companies in the world, and Rezidor, its hotel subsidiary) continues to be very positive for PPHE. As well as customer referrals, it provides reliance on a far larger and more sophisticated system than potentially in-house, ie in operation and under development over 220,000 rooms (1,400 hotels) in 115 countries and growing rapidly with 120 signings (almost 20,000 rooms) in 2015, and powerful brands, notably Radisson Blu. There should be further opportunity from the proposed combination of Carlson’s hotel interests with HNA Tourism of China.

There is substantial benefit from access to the alliance’s market-leading loyalty programmes for guests, business travel agents (“Look to Book”), meeting planners and corporates. Guest loyalty programme Club Carlson has been an important part of Carlson’s strategic commitment to help hotels increase revenue. Membership is over 15m, up c 70% since 2012. It was ranked among the best three hotel rewards programmes for 2015-16 by U.S. News and World Report. PPHE confirms that increased loyalty apart, room rates from members tend to be higher than from non-members.

E-commerce initiatives, boosted by the Carlson relationship, include email marketing, online advertising and building affiliate networks, such as with airlines and car rental companies. The company’s social media fan base, which is well ahead of that of other hotel brands of similar size, continues to be actively managed.

Development strategy

PPHE has a clear aim to use its reputed brands to become a leading hotel operator in upscale and lifestyle hotel segments. In this regard a confirmed development pipeline is set to add c 1,400 rooms (c 17% of current stock) in existing markets over the next three years (see Exhibit 2), thereby consolidating the company’s strong position in London with c 3,500 rooms (leading owner-operator glh has c 5,000). The proximity of the Waterloo site to existing company properties brings a unique ability to offer 1,000 rooms in one area for events in central London. Projected spend there is c £70m, suggesting a total build per key (including land costs of c £25m) of about £140,000, which compares well with the London market. The Park Royal project is on a two-acre mixed-use development site in West London next to Park Royal Business Park (over 1,000 businesses) and close to Wembley Stadium, the SSE Arena and the Westfield Shopping Centre; it has good transport links, fronting the A40 and opposite Park Royal Underground station. In the longer term, it is particularly creditable that PPHE and art’otel have been selected as operator and brand at the landmark Battersea Power Station development (42 acre site, 25,000 people living and working on site with 40m visits expected each year). Elsewhere, in Hoxton, planning continues for an innovative cylindrical shaped 18-storey hotel within the South Shoreditch Conservation Area. Competition is fierce for scarce quality assets, but PPHE’s gateway strategy is proven and there should be opportunity to sell advantageously, if wanted.

Exhibit 2: Development pipeline exclusively in London

Opening

Rooms

Wholly owned:

Park Plaza Riverbank extension and reconfiguration

Dec 2016

184

Park Plaza Waterloo

Dec 2016

494

Park Plaza Park Royal

Dec 2016

212

Joint venture:

art’otel Hoxton

2019

352

Managed:

art’otel battersea power station

2019

160

Total

1,402

Source: PPHE Hotel Group

There should also be significant opportunity as a result of PPHE’s newly increased investment in Croatia. This brought control (66% holding) of Zagreb-quoted Arenaturist, a long-established hospitality group consisting of seven hotels (four under the Park Plaza brand), six holiday apartment complexes and eight campsites, all in prime seaside locations in the south of Istria. The business has been managed by PPHE since 2008. Apart from the promise of enhanced involvement in a long-term growth market (see Exhibit 3), management looks to develop Arenaturist across Central and South-Eastern Europe under the Park Plaza brand. Meanwhile it has recently agreed to acquire the freeholds of art’otels cologne and berlin kudamm, currently leased by PPHE.

Exhibit 3: Annual growth in Croatia tourism (peak trading June-Sept foreign tourist nights)

Source: Croatian Bureau of Statistics

With other projects under consideration, management does not regard debt as a restriction to growth as long as it can be serviced and is secured judiciously against likely appreciating assets. This is evident in a recent successful record of refinancing the bulk of its owned estate in London and the Netherlands on a loan-to-value ratio of c 50-65% on total committed facilities (average LTV 56%). Also under review is a potential release of part of the value of the hotel assets, while retaining operational control (sale and leaseback is not favoured).

Exhibit 4: Recent refinancings of key company hotels

Date

Facility

Independent market valuation

Loan-to-value %

London:

Victoria

March 2016

£87m

£161m

54%

Westminster Bridge

May 2016

£182m

£370m

49%

Sherlock Holmes + Riverbank

June 2016

£150m

£254m

59%

Netherlands

June 2016

€182m*

€279m*

65%

Total

£563m

£1,006m

56%

Source: PPHE Hotel Group. Note: *Exchange rate £/€1.26.

Management

PPHE’s senior management (see below), which is based at the company’s head offices in Amsterdam and London, is backed by highly-experienced local management.

President and CEO Boris Ivesha has over 50 years’ experience in the hotel industry, including as general manager of the Royal Horseguards Hotel, London and managing director of the Carlton Hotel, Tel Aviv. He established the Yamit Hotel, Tel Aviv in 1984 (now the Park Plaza Orchid, franchised by the company). In 1994 he brought the Park Plaza Hotels & Resorts brand to the company in partnership with the Red Sea Group.

Deputy CEO and CFO Chen Moravsky has been CFO since 2005 and deputy CEO since 2014. He joined from the Red Sea Group, where he was financial director. He was previously an audit manager at Deloitte.

Non-Executive Chairman Eli Papouchado is founder and former chairman of the Red Sea Group, the company’s largest shareholder. He has been actively involved in the development, financing, acquisition and management of PPHE’s leading hotels and the development of shopping malls and large residential projects in the US, Eastern Europe and the Middle East.

Sensitivities

The hotel industry is highly cyclical and dependent on the global economy. PPHE competes for a share of disposable consumer income, which may be eroded by economic downturn.

Geopolitical events and natural disasters can have a significant impact on profitability. The company maintains a diverse guest nationality mix to minimise this risk.

Interests of the chairman and chief executive have material control over the company (c 63% holding at August 2016). There is a propensity for related-party transactions, which are subject to arm’s-length terms of relationship agreements.

PPHE is significantly reliant on its relationship with Carlson. However, termination of its territorial licence by Carlson is possible only in very limited circumstances and in any case the relationship remains strong.

Much of the company’s cost base is fixed. This risk can be mitigated by effective yield management and the development of as flexible a business model as possible.

An active development programme may tie up balance sheet capacity and lead to asset write-downs if they fail. Growth depends on the availability of suitable sites and access to funding.

There is exchange rate exposure. There is also a debt financing and interest rate risk. A guaranteed yield to owners of units at Westminster Bridge until 2019-20 may not be covered by net income from those units, although its proven trading strength suggests this is unlikely.

Valuation

PPHE is a relatively small hotel group, but one that is trading well in the UK and in terms of its international brands. We look at primarily Europe-based international hotel groups for comparative guidance. As well as size differences, structural variations in business models, eg the increased popularity of ‘asset-light’ structures and associated low indebtedness, and geographical coverage, mean that comparisons are inexact. We explore valuation on two metrics: asset value and EBITDA.

Exhibit 5: Peer comparison of EV/EBITDA rating and price-to-book

Price

EV/EBITDA

Market cap

Net debt

EV

Price-to-book (last reported NAV)

2016e

2017e

2016e

2016e

Historical cost

Fair value

PPHE

682p

10.2

8.6

£288m

£580m

£868m

0.8

0.4

Millennium & Cop

460p

9.5

9.4

£1.5bn

£0.6bn

£2.1bn

0.5

-

GL

S$0.77

9.3*

10.1**

$710m

$220m

$930m

0.7

-

Mandarin Oriental

$1.29

12.4Á

13.3Á

$1.6bn

$0.3bnÁ

$1.9bnÁ

1.3

-

Dalata

386p

12.7

10.7

€810m

€240m

€1.0bn

1.7§

1.4

NH

€3.80

10.7

8.8

€1.3bn

€0.8bn

€2.1bn

1.1

-

Meliá International

€10.35

10.4

9.0

€2.4bn

€0.5bn

€2.9bn

1.6

-

AccorHotels

€34.60

10.9

9.3

€9.9bn

€1.1bn

€11.0bn

2.2

-

Rezidor

SEK36.40

6.5

5.3

€640m

(€20m)

€620m

2.6

-

Whitbread

3,455p

9.3¶

8.9 µ

£6.3bn

£1.1bn

£7.4bn

2.6

-

Source: Bloomberg. Notes: § Dalata adjusted to historical cost, ie €97m less than assets reported at fair value. *Year-end June 2016. **Year-end June 2017. Á Including associates’ EBITDA and net debt. ¶ Year-end February 2017. µ Year-end February 2018. Prices at 12 December 2016. Exchange rates: £/€ 1.15, S$/$ 0.70 and SEK/€ 0.103.

Asset value

We look first at investor perception of PPHE’s property assets. With c 80% of room stock under ownership, this is a key metric and, in our view, the predominant one. The market valuation (price to book 0.8x) appears at a considerable discount to those of similarly asset-backed operations such as Mandarin Oriental (1.3x) and Dalata (1.7x). While at a premium to Millennium & Copthorne (0.5x) and to GL (0.7x), we suggest that this is a function of company-specific issues, notably concern respectively about Asian markets and the oil price (oil-related income forming a significant part of GL’s results). NH (1.1x) and Meliá (1.6x) are also relevant to PPHE valuation, given their residual estates, but the largely asset-light models of AccorHotels, Rezidor and Whitbread are not.

On a fair value basis, PPHE’s share price discount to adjusted NAV is even wider at 0.4x. Here we adjust the reported net assets for independent valuations in respect of the various property refinancings in H116. Fair value adjustment of £445m, as reported in H1, results in an adjusted NAV of c £18.50 per share with a further material uplift expected as the new London hotels come on stream.

Read-across to the real estate sector

As a complement to our hotel industry comparison, we consider in Exhibit 6 the valuation of quoted property companies (freehold hotels, offices and residential property). We select companies with high-quality assets in prime city locations in the US, UK, France, Germany, Hong Kong and Singapore. We limit our scope to companies with market cap of US$0.25-5bn and (for the purpose of market valuations unaffected by liquidity issues) a free float of 75% or over.

Exhibit 6: Peer comparison of price-to-book of quoted real estate companies

Source: Bloomberg, Edison Investment Research. Note: Legend indicates country of listing.

The range of valuation is broad, as this is not an exact science, but the range of share price relationship to NAV (very largely between 0.5x and 1.5x) may be viewed as supportive to PPHE. The appropriate comparison with PPHE is on a fair value basis (0.4x), as property companies report on this basis. Of the 28 companies in our sample size, 26 are trading at above this level.

EV/EBITDA valuation

The company’s 2017e EV/EBITDA rating of 8.6x appears below average (9.4x) in the range of 5-13x for the companies shown in Exhibit 5. Arguably the majors should stand at a premium in view of their scale, brand strength and record. The rating may also reflect PPHE’s limited liquidity.

Valuation catalysts

The imminent London openings may be expected to spark new interest and hence greater investor awareness of the company’s focus and strong record on asset appreciation. Despite understandable security and geopolitical concerns, the consultancy HVS remains “cautiously optimistic” about the appeal of the European market to global investors over the medium to long term. Brexit uncertainty may have contributed to much lower hotel transaction activity than in any of the last three years but foreign investors and visitors will surely take advantage of sterling depreciation. Significantly, press speculation suggests the 582-room DoubleTree by Hilton Tower of London has just been sold for £300m, ie £515,000 per key. Chinese groups continue to invest heavily in hotel chains, notably HNA Tourism in Hilton following NH Hotels and Carlson Hotels and Jin Jiang in AccorHotels and Louvre Hotels, not least in expectation of a significant increase in the number of Chinese travellers to Europe. We are reassured by latest Q316 reports from the European hotel industry, which suggest resilience away from immediately affected areas such as Paris, Brussels and London. The enduring appeal of trophy hotel assets should spill over while, importantly, our forecasts do not take account of the likely full benefit of PPHE’s current real estate activity. Resort locations in an apparent ‘safe haven’ like Croatia should benefit from displaced demand from North Africa and Turkey.

Financials

Exhibit 7: Analysis of revenue and profit

Y/E December (£m)

H115

H215

FY15

H116

H216e

FY16e

FY17e

Revenue

UK

London

RevPAR

£124

£144

£134

£118

£144

£131

£132

Change

Flat

+1%

+1%

-5%

Flat

-2%

+1%

Available rooms

1880

1880

1880

1898

1898

1898

1898

Room revenue

42.4

49.5

91.9

41.0

50.0

91.0

91.5

Non-room revenue

20.9

22.8

43.7

20.5

22.5

43.0

43.0

Existing revenue

63.3

72.3

135.6

61.5

72.5

134.0

134.5

Waterloo + Park Royal + Riverbank extension*

-

-

-

-

2.0

2.0

47.0

Total London revenue

63.3

72.3

135.6

61.5

74.5

136.0

181.5

Leeds and Nottingham

5.2

6.6

11.8

4.9

6.6

11.5

11.5

UK

68.5

78.9

147.4

66.4

81.1

147.5

193.0

Netherlands (€m)

28.4

30.1

58.5

29.6

30.4

60.0

60.6

Exchange rate

1.38

1.39

1.38

1.28

1.16

1.22

1.15

Netherlands

20.6

21.7

42.3

23.2

25.8

49.0

51.5

Croatia (HRKm)

-

-

-

92.1

287.9

380.0

390.0

Exchange rate

-

-

-

9.63

8.67

9.15

8.70

Croatia**

-

-

-

9.6

32.4

42.0

44.0

Germany and Hungary***

10.4

11.4

21.8

10.6

12.4

23.0

24.5

Owned & leased hotels

99.5

112.0

211.5

109.7

151.8

261.5

313.0

Management and holdings

2.7

4.5

7.2

1.8

2.7

4.5

5.0

TOTAL

103.2

116.5

218.7

111.6

154.4

266.0

318.0

EBITDA

UK

London

Existing

23.6

28.8

52.4

20.3

26.8

47.1

47.1

Margin (%)

37

40

39

33

37

35

33

Waterloo + Park Royal + Riverbank extension*

-

-

-

-

(3.0)

(3.0)

9.5

Total London EBITDA

23.6

28.8

52.4

20.3

23.8

44.1

56.6

Leeds and Nottingham

0.8

1.2

2.0

0.7

1.2

1.9

1.9

UK

24.4

30.0

54.4

21.0

25.0

46.0

58.5

Netherlands (€m)

8.8

9.8

18.6

9.5

9.7

19.2

19.4

Exchange rate

1.38

1.39

1.38

1.28

1.16

1.22

1.15

Netherlands

6.4

7.0

13.4

7.4

8.1

15.5

16.4

Croatia (HRKm)

-

-

-

14.9

112.1

127.0

116.0

Exchange rate

-

-

-

9.63

8.67

9.15

8.70

Croatia**

-

-

-

1.5

12.5

14.0

13.0

Germany and Hungary**

(0.4)

0.1

(0.4)

(0.8)

0.3

(0.5)

0.1

Owned & leased hotels

30.3

37.1

67.5

29.2

45.8

75.0

88.0

Management and holdings

4.8

7.8

12.6

3.3

6.7

10.0

10.0

TOTAL

35.1

45.0

80.1

32.5

52.5

85.0

98.0

Source: Edison Investment Research. Note: *Late Q416: Waterloo 494 rooms, Park Royal 212 rooms and Riverbank extension 184 rooms. **From April 2016. ***Including Nuremberg 177 rooms from June 2016.

Challenging H116

The first half to June 2016 saw contrasting fortunes for PPHE’s two main profit sources, London and the Netherlands, as well as consolidation from April of operations in Croatia after buying in its joint venture. There were also significant corporate transaction costs, which we assume to have accounted for much of the overall £2.6m (7%) decline in EBITDA. While London trading was predictably subdued (-5% RevPAR was in line with market reports for the capital – see Exhibit 8), the focus on room rate (+1%) could not prevent cost pressures (eg selling and payroll) driving UK EBITDA down 14%. Netherlands again stole the show with RevPAR up 5% on a demanding comparative and EBITDA up 16%, albeit currency-boosted. Croatia’s initial EBITDA contribution was predictably minor as Q2 is its shoulder period.

Exhibit 8: Changes in RevPAR in PPHE’s key London market

Source: STR

2016 forecast maintained

Trading update confirmation of a “good” Q3 reinforces our confidence in our full-year forecasts. 9% higher like-for-like revenue in Q3 was driven by Croatia where in its peak period buoyant trading was complemented by a favourable accommodation mix (a shift to hotels and apartments from mobile homes). London held up well, which is encouraging, given continued difficult conditions (Q3 RevPAR, per STR, was flattered by the Farnborough Airshow and a later Wimbledon). Netherlands softened after a bumper first half, partly because sterling weakness depressed Amsterdam’s key feeder market from the UK.

However, caution is justifiable ahead of PPHE’s strongest trading period, Croatia apart. For London this fits recent comments by hotel groups, while October will inevitably have been well down on last year owing to no Rugby World Cup. We assume further stabilisation in the capital in view of resilient UK overseas visitor numbers (+2% post referendum, per ONS) and the lure of the UK as a cheaper destination owing to sterling weakness (PPHE is well-placed to benefit in the holiday period from its breadth of family-friendly accommodation in London). H2 EBITDA margin reduction there on a par with H1 looks reasonable in the face of continued selling cost pressures and the full impact of the Living Wage (typically, 7.5% rate increase). The delay to late Q4 in opening two hotels and the Riverbank extension brings pre-opening costs without associated revenue, but initial consolidation of Croatia’s peak trading should make up for the likely EBITDA decline in PPHE’s main profit centre.

Material pay-off in 2017 and beyond

For next year, the profit driver remains the new rooms in London since costs may be expected still to be an issue and the first inclusion of loss-making Q1 will depress Croatia. Despite likely higher demand from value-seeking tourists and domestic vacationers obliged to stay at home, American Express GBT does not expect UK room rates to rise. We assume renovations planned by PPHE in London, Amsterdam and Utrecht not to be disruptive. Returns from £115m development spend included in our forecasts may accrue in full only beyond the scope of this review. We will update forecasts once key financials of the newly-proposed Arenaturist acquisition in Germany have been clarified. Meanwhile we expect the bottom line to improve owing to advantageous rates of financing.

Cash flow

The likely sharp rise in net debt in 2016 (we forecast £579m up from £398m) reflects in particular a spike in capex (£90m), buying in its Croatian joint venture (£51m), a 100p special dividend (£42m) and adverse foreign exchange (£23m). However, this is well within the company’s long-term bank facilities of c £690m, which now have an average term to maturity of about nine years after the H1 property refinancings. These also allowed that special dividend payment in respect of perceived excess cash. With regard to expansion, PPHE has a well-established policy and track record of borrowing within a 65% loan-to-value requirement of its banks eg June 2016 refinancings of two London and six Dutch hotels implied an asset value c £130m ahead of their book value at December 2015. Management is confident that it can leverage on its assets by opening similar facilities for future projects.

Exhibit 9: Financial summary

£000s

2014

2015

2016e

2017e

Year end 31 December

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

217,000

218,700

266,000

318,000

EBITDA

 

 

76,100

80,100

85,000

98,000

Operating Profit (before amort and except)

 

58,700

63,100

61,000

70,000

Intangible Amortisation

(2,200)

(2,000)

(2,100)

(2,100)

Operating Profit

56,500

61,100

58,900

67,900

Net Interest

(27,800)

(29,300)

(36,000)

(41,500)

Associates

(2,300)

(2,000)

(1,500)

0

Exceptionals

7,000

(1,800)

3,300

0

Profit Before Tax (norm)

 

 

28,600

31,800

23,500

28,500

Profit Before Tax (FRS 3)

 

 

33,400

28,000

24,700

26,400

Tax

(200)

1,200

0

0

Profit After Tax (norm)

28,400

33,000

23,500

28,500

Profit After Tax (FRS 3)

33,200

29,200

24,700

26,400

Average Number of Shares Outstanding (m)

41.5

41.8

42.1

42.2

EPS - normalised (p)

 

 

68.9

76.1

51.1

63.3

EPS - normalised fully diluted (p)

 

 

68.9

76.1

51.1

63.3

EPS - (IFRS) (p)

 

 

80.0

69.9

53.9

58.3

Dividend per share (p)

19.0

20.0

20.0

21.0

EBITDA Margin (%)

35.1

36.6

32.0

30.8

Operating Margin (before GW and except.) (%)

27.1

28.9

22.9

22.0

BALANCE SHEET

Fixed Assets

 

 

844,400

885,600

1,139,000

1,117,000

Intangible Assets

25,400

21,900

25,000

23,000

Tangible Assets

641,500

687,500

940,000

917,000

Income units sold to private investors

129,400

125,500

124,000

122,000

Investments

48,100

50,700

50,000

55,000

Current Assets

 

 

77,700

71,700

182,000

192,000

Restricted deposits

3,200

3,200

10,000

10,000

Stocks

900

1,000

2,000

2,000

Debtors

11,800

9,100

15,000

15,000

Cash

55,800

50,600

140,000

145,000

Other

6,000

7,800

15,000

20,000

Current Liabilities

 

 

(46,100)

(59,900)

(109,000)

(91,000)

Creditors

(33,700)

(48,500)

(80,000)

(80,000)

Deposits from unit holders

0

0

0

0

Short term borrowings

(12,400)

(11,400)

(29,000)

(11,000)

Long Term Liabilities

 

 

(623,500)

(629,500)

(867,000)

(858,000)

Long term borrowings

(420,100)

(440,100)

(700,000)

(700,000)

Financial liability to unit holders

(140,500)

(136,200)

(132,000)

(128,000)

Other long term liabilities

(62,900)

(53,200)

(35,000)

(30,000)

Net Assets

 

 

252,500

267,900

345,000

360,000

CASH FLOW

Operating Cash Flow

 

 

75,600

83,200

83,600

98,000

Net Interest

(32,100)

(32,500)

(37,800)

(42,200)

Tax

(100)

(100)

(100)

(100)

Capex

(34,200)

(63,100)

(90,000)

(25,000)

Acquisitions/disposals

9,700

(3,600)

(63,000)

0

Exchange rate

10,000

6,000

(23,000)

0

Dividends

(7,100)

(8,300)

(51,000)

(8,700)

Other

3,400

(5,800)

0

0

Net Cash Flow

25,200

(24,200)

(181,300)

22,000

Opening net (debt)/cash

 

 

398,700

373,500

397,700

579,000

HP finance leases initiated

0

0

0

0

Other

0

0

0

0

Closing net (debt)/cash

 

 

373,500

397,700

579,000

557,000

Source: Company accounts, Edison Investment Research

Contact details

Revenue by geography (2017e)

Address 1
Vinoly Tower, 5th floor
Claude Debussylaan 14
1082 MD Amsterdam
The Netherlands
+31 207178600
www.pphe.com

Contact details

Address 1
Vinoly Tower, 5th floor
Claude Debussylaan 14
1082 MD Amsterdam
The Netherlands
+31 207178600
www.pphe.com

Revenue by geography (2017e)

Management team

President and CEO: Boris Ivesha

Non-Executive Chairman: Eli Papouchado

Boris Ivesha has spent over 50 years in the hotel industry, including general manager of the Royal Horseguards Hotel, London, and managing director of the Carlton Hotel, Tel Aviv. He established the Yamit Hotel, Tel Aviv, in 1984 (now the Park Plaza Orchid, franchised by the company). In 1994, he brought the Park Plaza Hotels & Resorts brand to the company in partnership with the Red Sea Group.

Eli Papouchado is founder and former chairman of the Red Sea Group, the company’s largest shareholder. He is actively involved in development, financing, acquisition and management of the company’s leading hotels and development of shopping malls and large residential projects in the US, Eastern Europe and the Middle East. He is former chairman of the Israel Hotel Association.

Deputy CEO and CFO: Chen Moravsky

Chen Moravsky has been CFO since 2005 and deputy CEO since 2014. He joined the company from the Red Sea Group where he was financial director. He was previously an audit manager at Deloitte.

Management team

President and CEO: Boris Ivesha

Boris Ivesha has spent over 50 years in the hotel industry, including general manager of the Royal Horseguards Hotel, London, and managing director of the Carlton Hotel, Tel Aviv. He established the Yamit Hotel, Tel Aviv, in 1984 (now the Park Plaza Orchid, franchised by the company). In 1994, he brought the Park Plaza Hotels & Resorts brand to the company in partnership with the Red Sea Group.

Non-Executive Chairman: Eli Papouchado

Eli Papouchado is founder and former chairman of the Red Sea Group, the company’s largest shareholder. He is actively involved in development, financing, acquisition and management of the company’s leading hotels and development of shopping malls and large residential projects in the US, Eastern Europe and the Middle East. He is former chairman of the Israel Hotel Association.

Deputy CEO and CFO: Chen Moravsky

Chen Moravsky has been CFO since 2005 and deputy CEO since 2014. He joined the company from the Red Sea Group where he was financial director. He was previously an audit manager at Deloitte.

Principal shareholders

(%)

Red Sea Group

44

Molteno Limited

19

Aroundtown Property Holdings Limited

9

Hargreave Hale

6

Companies named in this report

Millennium & Copthorne, Dalata, IHI, GL Limited, Mandarin Oriental, Whitbread, AccorHotels, NH Hotel Group, Meliá International, Rezidor.

Edison, the investment intelligence firm, is the future of investor interaction with corporates. Our team of over 100 analysts and investment professionals work with leading companies, fund managers and investment banks worldwide to support their capital markets activity. We provide services to more than 400 retained corporate and investor clients from our offices in London, New York, Frankfurt, Sydney and Wellington. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2016 Edison Investment Research Limited. All rights reserved. This report has been commissioned by PPHE Hotel Group and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.
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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

Edison, the investment intelligence firm, is the future of investor interaction with corporates. Our team of over 100 analysts and investment professionals work with leading companies, fund managers and investment banks worldwide to support their capital markets activity. We provide services to more than 400 retained corporate and investor clients from our offices in London, New York, Frankfurt, Sydney and Wellington. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2016 Edison Investment Research Limited. All rights reserved. This report has been commissioned by PPHE Hotel Group and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.
Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2016. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

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