TP Group — Update 13 September 2016

TP Group — Update 13 September 2016

TP Group

Andy Chambers

Written by

Andy Chambers

Director, Industrials

TP Group

On a steady bearing

H116 results

Aerospace & defence

13 September 2016

Price

5.75p

Market cap

£24m

Net cash (£m) at 30 June 2016

7.5

Shares in issue

420.9m

Free float

99%

Code

TPG

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

4.6

48.4

58.6

Rel (local)

7.4

36.5

46.1

52-week high/low

6.0p

2.1p

Business description

TP Group is a specialist engineering, technical and managed services group, delivered by four capability-based divisions: Design & Technology (4% FY15 revenue), Engineering (35%), Maritime (54%) and Managed Solutions (7%), primarily for defence, aerospace, energy & maritime markets.

Next events

Capital reduction court confirmation

8 September 2016

Analysts

Andy Chambers

+44 (0)20 3681 2525

Roger Johnston

+44 (0)20 3077 5722

TP Group is a research client of Edison Investment Research Limited

Half year results from TP Group confirmed that progress is in line with market expectations for the full year. Revenues, profitability and cash flow all continued to improve, and order intake is growing in H2. The company’s strategy is being consistently delivered and once the recapitalisation is approved, TP Group should be well positioned to augment organic returns and shareholder value creation with strategic bolt-ons. Our revised sum-of-the-parts fair value estimate, based on the new divisional EBITDA contribution in 2017, is currently 8.48p.

Year
end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

12/14

21.7

(3.4)

(0.8)

0.0

N/A

N/A

12/15

20.4

(1.2)

(0.2)

0.0

N/A

N/A

12/16e

22.7

(0.2)

0.0

0.0

N/A

N/A

12/17e

24.6

0.8

0.1

0.0

N/A

N/A

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles and exceptional items.

H1 results underpin full year expectations

H116 saw a continuation of the improving trend apparent in 2015. Revenue has grown 13% to £9.4m (H115 £8.3m), generating a break-even performance at the EBITDA level, an improvement of £1m over the comparable period. Even more encouragingly, the company generated £0.5m of net cash flow leaving cash balances at £7.5m at the period end. While the group order book was marginally lower at the half year at £13.4m (£14.5m at FY15), subsequent order intake and indications suggest positive development through H2, with a strong Q3 order intake already apparent. Indeed, the change of management at TPG Engineering, which suffered from a downturn in activity in the energy sector, saw order intake improve 40% during H116, with the order backlog duration doubling to four months.

Management continues to deliver to plan

Management continues to deliver the transformation of the strategy and business model to plan, as it positions itself as a Tier 2 defence engineering and services group. A strong sales pipeline now stands at c£150m and includes two sole source contracts for the MOD in TPG Maritime worth c£50m that are due to start negotiation shortly. With organic opportunities looking promising, the recently announced capital reorganisation should enable the process to accelerate further. The greater flexibility to pursue M&A opportunities is expected to augment growth and shareholder value development. Management is likely to seek to maintain credibility by being very selective in the opportunities being presented.

Valuation: Moving to profitable growth

Our fair value for TP Group stands at 8.48p. We utilise the new divisional structure and FY17 expectations as the basis for our calculation. As the company moves increasingly into a profitable and cash-generating phase, normal metrics will clearly start to apply. However, we feel the acceleration of the strategy both organically and through M&A should deliver growth in shareholder returns ahead of the market.

Continued progress in H116

Exhibit 1: TP Group interim results summary H116

Half year to June (£'000)

2015

2016

% change

Revenue

8,340

9,363

12.3%

Cost of sales

-6,161

-6,878

11.6%

Gross Profit

2,179

2,485

14.0%

Gross margin

26.1%

26.5%

SG&A

-4,795

-3,262

-32.0%

Operating loss

-2,616

-777

-70.3%

Adjusted EBITDA

-965

12

-101.2%

D&A

-686

-540

-21.3%

EBIT

-1,651

-528

-68.0%

Exceptionals & one-offs

-965

-249

-74.2%

Operating loss

-2,616

-777

-70.3%

Net Interest

6

-69

-1,250.0%

PTP

-2,610

-846

-67.6%

Tax

70

70

0.0%

Net Income

-2,540

-776

-69.4%

EPS

-0.60

-0.13

-78.3%

FCF

-2,050

477

-123.3%

Net cash

6,623

7,482

13.0%

Source: Company reports

Group revenues increased by 13% largely as a result of the growth of TPG Maritime as it started to increase its strong opening order backlog. Growth was further supported by increased activity in TPG Managed Services where the pipeline of opportunities is developing rapidly. These more than offset a significant decline at TPG Engineering, principally driven by reductions arising from the energy sector that led to a low opening backlog. Gross margin increased by 400bp to 26.5%.

A break-even adjusted EBITDA in H116 represents a continuation of the full year performance in 2015. We expect progress to continue in the second half and maintain our forecast for adjusted EBITDA just above £0.9m for FY16 on revenue growth of 11% for the full year.

Exhibit 2: TP Group half-year breakdown by division

Year to Dec (£m)

H115a

H215a

FY15a

H116a

H216e

FY16e

Revenues

TPG Design & Technology

0.4

0.5

0.9

0.3

0.6

0.9

TPG Engineering

3.7

3.4

7.1

2.7

4.8

7.5

TPG Managed Solutions

0.5

1.0

1.5

1.2

0.7

1.9

TPG Maritime

3.7

7.2

10.9

5.2

7.2

12.4

Group

8.3

12.1

20.4

9.4

13.3

22.7

Adjusted EBITDA

TPG Design & Technology

-1.0

-0.6

-1.6

-0.7

-0.3

-1.0

TPG Engineering

-0.1

-0.1

-0.2

-0.6

-0.2

-0.8

TPG Managed Solutions

0.0

0.2

0.2

0.1

0.0

0.1

TPG Maritime

0.6

2.2

2.8

1.7

2.0

3.7

Central costs

-0.5

-0.6

-1.1

-0.5

-0.6

-1.1

Group

-1.0

1.0

0.0

0.0

0.9

0.9

Source: Company reports; Edison Investment Research estimates

Order intake augurs well for continuing growth

The huge order pipeline of £150m is potentially close to significant awards. Two MOD sole source contracts for submarine supply and support were recently announced and are under negotiation at TPG Maritime. Following the recent award by TKMS (Thyssen Krupp Marine Systems), the division now provides its air purification systems to almost all of the entire high end conventional submarine producers.

However, opportunities are being pursued not just in the UK but also in Europe, the Far East and Australasia. The combination of skill across the units is also allowing more effective tendering for a broader range of capability, which is also providing increased cross-selling opportunities and referrals.

The latest contract win also shows how the capability is being extended within the businesses. The large steam condenser supply contract won by TPG Engineering for a major UK chemical processing plant is the first of its kind for the division. The contract, worth just under £0.5m, includes not just the conventional heat exchangers, but also the other mechanical equipment (fans, pumps etc) and system packaging that make up the entire system. TPG Engineering will support installation and commissioning in early 2017 as well as the design and manufacture. It represents the first end-to-end solution for thermal equipment supplied by the Manchester based business.

Capital reduction should further progress the strategy

Having been approved by shareholders on 8 September, the capital reduction is expected to be confirmed by the Court on 28 September. By eliminating the accumulated deficit, TP Group should start to build increasing levels of distributable reserves as it increases profitability, until it commences dividend payments at some future date.

In addition, the reduction in the nominal value of the shares allows management to both incentivise employees as well as consider the use of equity issuance against future M&A deals. We continue to regard both of these factors as positive developments in the reorientation of the group.

Valuation: Move to profitable growth is key

Exhibit 3: TP Group peer sum-of-the-parts valuation FY17e basis

 

EBITDA (FY17e)

PER
(x)

Value
(£m)

Notes

TPG Maritime

3.8

9.5

36.0

10% premium to UK A&D (9.3x EV/EBITDA)

TPG Engineering

0.1

11.9

1.2

UK Industrials average

TPG Managed Services

0.2

10.0

2.0

Average of Cohort and Babcock

TPG Design and Technology

-1.1

0

0.0

Less central costs

-1.1

10.5

-11.5

UK Industrials average

EV

27.7

Net cash

8.0

FY16 net cash

Equity value

35.7

Shares in issue (m)

420.9

Implied fair value per share (p)

 

 

8.48

 

Source: Edison Investment Research estimates

Our revised sum-of-the-parts peer group valuation is based on the new divisional split, and our forecast adjusted EBITDA generation for FY17. In our opinion, growth prospects for TPG Maritime warrant a premium compared to Aerospace & Defence peers, and TPG Engineering now looks much more like a traditional UK industrial engineering activity. Managed Services is compared to other defence outsourcing and technical advisory companies, namely Babcock International and Cohort. While we expect Design and Technology to generate a continued loss, the intrinsic value of its expertise should be worth more than zero, where we have, for now, positioned it.

As this methodology continues to value the group at less than the value of TPG Maritime plus net cash, we consider it likely to prove moderately conservative as TP Group grows top line, earnings and cash flow beyond 2017. It currently generates a value of 8.48p.

Exhibit 4: Financial summary

£m

2014

2015

2016e

2017e

Year end 31 December

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

21.7

20.4

22.7

24.6

Cost of Sales

(17.6)

(14.8)

(16.3)

(17.6)

Gross Profit

4.1

5.6

6.3

7.0

EBITDA

 

 

(2.1)

0.0

0.92

1.9

Operating Profit (before amort. and except.)

(3.5)

(1.3)

(0.2)

0.8

Intangible Amortisation

0.0

0.0

0.0

0.0

Exceptionals

(0.5)

(1.0)

(0.3)

(0.0)

Other

0.0

0.0

0.0

0.0

Operating Profit

(3.9)

(2.3)

(0.5)

0.7

Net Interest

0.0

0.1

0.0

0.0

Profit Before Tax (norm)

 

 

(3.4)

(1.2)

(0.2)

0.8

Profit Before Tax (FRS 3)

 

 

(3.9)

(2.2)

(0.5)

0.7

Tax

0.2

0.3

0.1

(0.2)

Profit After Tax (norm)

(3.2)

(0.9)

(0.2)

0.6

Profit After Tax (FRS 3)

(3.7)

(1.9)

(0.4)

0.6

Average Number of Shares Outstanding (m)

420.9

420.9

420.9

420.9

EPS - normalised (p)

 

 

(0.8)

(0.2)

(0.04)

0.1

EPS - normalised fully diluted (p)

 

 

(0.8)

(0.2)

(0.0)

0.1

EPS - (IFRS) (p)

 

 

(0.9)

(0.5)

(0.1)

0.1

Dividend per share (p)

0.0

0.0

0.0

0.0

Gross Margin (%)

19.1

27.4

28.0

28.4

EBITDA Margin (%)

-9.7

0.2

4.1

7.7

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

-15.9

-6.3

-0.9

3.2

BALANCE SHEET

Fixed Assets

 

 

15.9

15.0

15.0

15.0

Intangible Assets

14.9

14.5

14.5

14.5

Tangible Assets

1.0

0.6

0.5

0.5

Investments

0.0

0.0

0.0

0.0

Current Assets

 

 

17.1

13.7

14.5

15.9

Stocks

0.1

0.2

0.1

0.4

Debtors

7.2

6.4

6.3

6.6

Cash

9.6

7.0

8.0

8.8

Other

0.2

0.1

0.1

0.1

Current Liabilities

 

 

(7.6)

(5.8)

(6.0)

(5.9)

Creditors

(7.6)

(5.8)

(6.0)

(5.9)

Short term borrowings

0.0

0.0

0.0

0.0

Long Term Liabilities

 

 

(3.3)

(2.8)

(2.2)

(2.2)

Long term borrowings

0.0

0.0

0.0

0.0

Other long term liabilities

(3.3)

(2.8)

(2.2)

(2.2)

Net Assets

 

 

22.0

20.2

21.3

22.8

CASH FLOW

Operating Cash Flow

 

 

(3.4)

(1.6)

1.0

1.0

Net Interest

0.0

0.0

0.2

0.0

Tax

(0.0)

0.1

0.0

0.0

Capex

(0.2)

(0.2)

(0.2)

(0.2)

Acquisitions/disposals

0.0

(0.9)

0.0

0.0

Financing

(0.6)

(0.0)

0.0

0.0

Dividends

0.0

0.0

0.0

0.0

Net Cash Flow

(4.2)

(2.6)

1.0

0.8

Opening net debt/(cash)

 

 

(13.7)

(9.6)

(7.0)

(8.0)

HP finance leases initiated

0.0

0.0

0.0

0.0

Other

0.0

0.0

0.0

0.0

Closing net debt/(cash)

 

 

(9.6)

(7.0)

(8.0)

(8.8)

Source: Company reports, Edison Investment Research estimates

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 TP 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.

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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 TP 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

Research: Consumer

PPHE Hotel Group — Update 13 September 2016

PPHE Hotel Group

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