PPHE Hotel Group. Operating results in line. Financial summary and valuation

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1 2 nd March 2018 Travel & Leisure Daily PPH.L Line, PPH.L, Trade Price(Last), 01/03/2018, 1, , , (-1.30%) Source: Eikon Thomson Reuters Market data EPIC/TKR PPH Price (p) m High (p) m Low (p) 755 Shares (m) 42.2 Mkt Cap ( m) 477 EV ( m) 1077 Free Float* 26% Market Main *As defined by AIM Rule 26 Description PPHE owns, co-owns, leases, franchises and manages a portfolio of 4* hotels with 9,000 rooms in Europe, with a strong emphasis on Central London. Real net asset value per share is significantly higher than the share price. Company information CEO Boris Ivesha CFO Daniel Kos Chairman Eli Papouchado Key shareholders Red Sea (Board) 47% Molteno (Board) 16% AroundTown Property 9% Hargreave Hale 6% Red Sea (Board) 47% Next event Sept-18 03/03/ /02/2018 (LON) A M J J A S O N D J F M A M J J A S O N D J F Q Q Q Q Q Q Q Q1 18 Price GBp 1, ,000 Interims Analysts Steve Clapham sc@hardmanandco.com 1,100 1, Auto PPHE Hotel Group Operating results in line PPHE reported final results that were slightly above our expectations at the EBITDA level, although higher tax and minorities left EPS below our forecasts. The dividend was 1p better than expected. Current profitability is constrained by a combination of cost pressures and by ongoing renovation in London and Amsterdam, which means that full operational capacity will not be achieved until The group has excess liquidity and is seeking to make investments, which we perceive positively given an outstanding track record. The rating remains at a discount to the real value of the asssets. Results: The results were in line with expectations at the operational level. The tax charge was a little higher (and the company guided that the tax rate would tick up), as was the minority interest in the Croatian subsidiary. Our EPS forecasts for this year have been modestly revised down. Strategy: The group has a high growth trajectory from a combination of excellent assets, shrewd acquisitions of development sites and existing assets, and renovation of older properties. Its expansion in Croatia and substantial liquidity offer the opportunity for incremental growth. Valuation: The market cap continues to stand at a significant discount to the value of the hotel assets, whose valuation shows a substantial uplift. The real value is ca. 18 per share, significantly in excess of the current share price. The prospective P/E is 17x, and the dividend yield over 2%. Risks: The company has debt, and the hotel business is susceptible to economic downturns, and can be affected by terrorist attacks. Currently, the London assets are suffering from a shortage of available labour, which is adding to existing cost pressures from the weak pound and business rates. Investment summary: The discount to the real asset value seems anomalous, in our view, although gearing used to be a pushback from investors. Financing deals illustrate that lenders are comfortable with the assets, and the company has now realised further cash. The asset value continues to grow, and the P/B multiple, as adjusted for the real value of assets, is at a discount. Financial summary and valuation Year-end Dec ( 000) E Sales EBITDA Operating profit Underlying PBT EPS (p) DPS (p) Net debt/ebitda (x) P/E (x) EV/Sales (x) EV/EBITDA (x) Dividend yield (%) Source: Hardman & Co Research Disclaimer: Attention of readers is drawn to important disclaimers printed at the end of this document

2 Final results Overview The group reported a good set of final results, with strong operational performance almost across the board, with only the Netherlands being held back by renovations at the Victoria in Amsterdam. The group overcame a number of issues in 2017, including the following. The tragic terrorist incidents in London. Pre-opening costs and build-up of two large openings in London. Refurbishment of half of a major hotel in Amsterdam. Inclusion this year, for the first time, of the loss-making 1Q period in Croatia. Upward cost pressures, especially in London. In spite of these headwinds, the group showed a strong increase in EBITDA, helped partly by the buyout of leases in Germany and a much higher number of average rooms. The main highlights were as follows. Reported total revenue increased by 19% to 325m. The company reported like-for-like (LFL) revenue growth of 10.3%. There are numerous adjustments to derive this, e.g. stripping out new hotels, adding in Croatian losses in 1Q 16, and adjusting for the two German leases where the freehold has been acquired. We cannot repeat these calculations, and the notes to the release do not disclose any FX adjustment, so this may include a currency translation benefit. In any case, we think the more relevant calculation is reported less FX, as this includes the impact of adding assets, which has been the primary driver of shareholder value. On the point of LFL growth, we would expect a favourable impact over the next 18 months from the maturing of the new assets at Waterloo and Park Royal, and the impact of refurbishments at Amsterdam Victoria and Sherlock Holmes in London. This should be offset by ongoing cost pressures, particularly in the London hotels, although these are at least partly in the comparative base. Reported EBITDA increased by 14% to 107m and, on a similar LFL basis as for revenue, EBITDA increased by 8.7%. Hence LFL EBITDA grew by less than revenue, with cost escalation being reflected in some slight margin pressure. The company s defined normalised profit before tax increased by 1.1%, although note that this was not adjusted for the Croatian losses in 1Q, which were included for the first time ( 3m or ca.10% of PBT), and it includes opening effects for the new London hotels, which obviously take time to get up to profitability. The company s defined normalised EPS was 58p (reported was 57p), a decline of 14%, but the dividend was raised 14% to 24p/share vs. our estimate of 23p, and was reflective of confidence in the outlook. 2nd March

3 On the outlook, the CEO stated trading in 2018 to date is in line with the Board's expectations and we look forward to focusing on a strong pipeline of renovations and developments which will further expand and enhance our hotel portfolio. We firmly believe that the superior quality of the new product and service offerings will stand us in good stead for healthy trading in the long term. In the analysts meeting presentation, this outlook was coloured by a comment that With a number of key renovation programmes taking place in 2018, we anticipate a slight reduction in services available to guests and this may result in a potential short term impact to final year-end hotel revenue levels. Putting all this together, we have left our 2018 EBITDA numbers unchanged at 112m and, with a higher tax rate, this translates into a reduction to our former EPS forecast, but solid earnings growth. The company has a large cash balance, which is earning little interest, while it is paying an average of 3.1% on its debt facilities, so there is a negative arbitrage here, which investors should adjust when considering the multiple obviously, this financial imbalance does not warrant much of a multiple, and indeed the company, in this respect, will be a beneficiary of rising interest rates, although that will not help the environment for hotel spending. Capex should turn out at ca m this year there is a 35m payment for Hoxton, 35m of capex, and perhaps some additional spend in Croatia. At the analysts meeting, the company disclosed, for the first time, that maintenance spending should be 4% of revenues, which is helpful in calculating free cashflow ratios. Management is aware of the large cash balance and is keen to do acquisitions, but bids on some UK portfolios were unsuccessful, and the company is engaged with a pipeline of single assets. Its discipline on acquisitions is encouraging, and we do not expect many significant transactions from the company in a hot market. There is still some organic and investment-driven growth to come from the portfolio, with two new art otels in London and some refurbishment spend. The shares continue to trade at a discount to the real value of the assets. The valuation on earnings grounds compares reasonably with international peers, but the latter have been showing higher short-term earnings growth. We would expect PPHE s EPS growth to overtake that of its the peers over the next few years, assuming that the group can deploy the excess cash as effectively as in recent years. 2nd March

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