PPHE Hotel Group More of the same Interim results Travel & leisure Premium RevPAR growth in London continues to drive PPHE. Robust trading and margin delivery saw the capital s H1 local currency EBITDA up c 10%, which is impressive in tough times. Despite a demanding Olympic comparative, essentially unchanged full-year forecasts may prove cautious, given the potential for lucrative rate-led RevPAR on near-capacity occupancy and the scope for PPHE s operational gearing to surprise, as last year. Asset sales remain on the cards, which should be a further catalyst for a share price at an excessive discount (c 45%) to NAV. 2 September 2013 Price 317.5p Market cap 132m 0.86/ Net debt as at end-june 2013 478.3 Shares in issue 41.5m Free float 21% Code PPH Year end Revenue EBITDA* PBT* EPS* (c) DPS (p) EV/EBITDA* (x) 12/11 202.4 65.0 16.2 38.8 6.0** 9.7 12/12 242.1 85.6 26.6 64.3 12.0 7.4 12/13e 237.0 80.0 22.6 54.5 12.0 7.9 12/14e 258.0 84.0 25.1 60.5 12.0 7.5 Note: *PBT, EBITDA and EPS are normalised, excluding intangible amortisation, exceptional items and share-based payments. **Indicates initial payment Primary exchange Secondary exchange Share price performance LSE N/A Continued outperformance H113 was notable for PPHE s ability once again to defy relative dullness in the London market, particularly in the second quarter, when we assume its RevPAR to have risen by c 8% after a slight decline in Q1. Notwithstanding a general pick-up and favourable Easter timing, the Q2 performance of the company s dominant profit source compares well with that of the market (up c 6% in Q2 according to TRI Hospitality). In H1, group EBITDA rose satisfactorily by 7%, excluding the change in ownership in the Netherlands from Q212 (like-for-like -9% in challenging conditions), currency movement and a non-recurrent incentive fee (reported +2%). Favourable asset management climate The potential release of part of the value of PPHE s hotel assets remains under review. Encouragingly, recent transactions show continuing strong appetite from international buyers for high-quality real estate, both in London and Amsterdam. The successful sale of InterContinental Park Lane suggests assets were sold on c 12x 2012 EBITDA, at c 650,000 per key and at 62% above end-2012 NBV. This was followed by Marriott s letter of intent for sale of its new EDITION in London and the disposal by NH Hoteles of the Grand Hotel Krasnapolsky in Amsterdam on c 9x 2012 EBITDA, c 300,000 per key and at 36% above book value. Valuation: Closing the discount to NAV Active asset management should bring better recognition of PPHE s riches. The current yawning c 45% discount to NAV is accentuated if fair value is taken into account (the independent valuation premium over book value of c 1.60 per share as at December 2011, adjusted for the Dutch transaction). At just under 8x 2013 EV/EBITDA, the trading valuation is undemanding compared with an average of over 10x 2013e for branded European peers (Accor, Meliá and NH Hoteles). % 1m 3m 12m Abs 3.8 2.4 51.2 Rel (local) 6.1 5.4 31.8 52-week high/low 323.5p 210.0p 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 and regional centres, predominantly in Europe. Next events Q3 IMS November 2013 Analysts Richard Finch +44 (0)20 3077 5700 Neil Shah +44 (0)20 3077 5715 consumer@edisongroup.com Edison profile page PPHE Hotel Group is a research client of Edison Investment Research Limited
Overcoming uncertainty H113 conquering post-games blues For the London market, the company s profit driver, the period was arguably a tale of two quarters with increasing strength particularly towards the end of the half more than making up for a difficult start and suggesting that the traditional Olympic host city hangover has clearly been shaken off. In Exhibit 1, market data show RevPAR was up 6% in Q2 after a decline of 3% in Q1 and thus an overall yield gain in the period (+1.5%) almost on a par with that of 2012, excluding Olympicsboosted Q3. Typically, and to PPHE s credit, the company outperformed this with a local currency RevPAR gain of c 4% for the whole period and its prized asset, the Westminster Bridge, again much to the fore. Furthermore, the increase in estimated EBITDA margin from 35% to 37% (see Exhibit 2) is all the more impressive since the yield rise was occupancy rather than rate led, unlike in 2012. By contrast, the company s Netherlands operations could not buck market weakness, with RevPAR down by 6% against a 3% decline in Amsterdam reported by TRI Hospitality, which translated predictably into a near double-digit reduction in the region s like-for-like EBITDA. Germany and Hungary improved slightly, albeit still in trading loss, while Management and Holdings EBITDA, spurred by buoyant trading in London and Croatia, rose by c 10% after adjusting for a one-off incentive fee in the previous period. NAV per share was up 4% since December at 6.54. Exhibit 1: Changes in RevPAR since 2012 in PPHE s major markets 10 5 % 0-5 H112 Q312 Q412 Q113 Q213 Jul-13 London Amsterdam Source: TRI Hospitality Consulting 2013 group EBITDA forecast maintained The blur of Olympic comparatives only compounds uncertainty borne of economic woes and the industry s inherent lack of visibility. The scale of distortion is apparent in Exhibit 1 as market reports of 40%+ RevPAR growth in London last August drove a bumper third quarter. Moreover, an apparently quiet start to H2 (July RevPAR down by 5% per TRI Hospitality and BDO LLP) looks to make 2012 an even harder act to follow. Reassuringly, occupancy at almost 90% is close to capacity, facilitating rate rises, and underlining the enhanced appeal of London following the Olympics. Given also PPHE s record of outperformance and a strong H1, we are raising slightly our full-year RevPAR estimate for London to -1% from -2%, ie c -5% in the second half. Our assumption of H2 EBITDA margin reduction from 42% to 39% seems reasonable. As a counter (no change in our group EBITDA forecast), we are now more cautious about the Netherlands after its difficult first half and have revised our full-year RevPAR forecast from +2% to -2%, which assumes a steady end to the period in line with latest market data (TRI Hospitality reports +1% for June) and PPHE trading (Q2 s notable improvement over Q1). Management remains confident about an early contribution from art otel Amsterdam, which is due to open soon. PPHE Hotel Group 2 September 2013 2
Our exchange rate assumption remains 1.16/, compared with 1.23 last year. Nevertheless, the UK increased its share of reported H1 EBITDA from 70% to 73%. H113 saw net debt rise from 460m to 479m, reflecting, in addition to final payments for the 2011 London buy-in, the acquisition of a prime site near Waterloo Station in London ( 23m) and an advance payment ( 6m) for the purchase of freehold interests in two art otel properties in Berlin, which it currently leases and manages. While the company appears to be trading well within its bank facilities, which are c 530m, we should point out the short-term maturity of two significant bank loans ( 18m in September 2013 and 26m in March 2014). Both facilities have yet to be refinanced. Exhibit 2: Analysis of revenue and profit Year end Dec H112 H212 FY12 H113 H213e FY13e 2014e Revenue London RevPAR 115 132 124 120 126 123 124 Change +5% +12% +9% +4% -5% -1% +1% Room revenue 39.8 45.7 85.5 41.4 43.6 85.0 85.8 Non-room revenue 16.4 19.6 36.0 17.3 18.7 36.0 36.7 London (existing) revenue ( m) 56.2 65.3 121.5 58.7 62.3 121.0 122.5 London art otel Hoxton + Western Ave* - - - - - - 7.0 Leeds + Nottingham 4.4 4.6 9.0 4.6 4.9 9.5 10.0 UK m revenue 60.6 60.9 130.5 63.3 67.2 130.5 139.5 Exchange rate 1.22 1.24 1.23 1.17 1.15 1.16 1.16 UK m revenue 73.9 87.2 161.5 74.2 77.3 151.5 161.8 Netherlands** 17.4 20.4 37.8 19.6 23.4 43.0 50.0 Germany & Hungary*** 15.4 17.2 32.6 15.3 18.2 33.5 37.0 Owned & leased hotels 106.7 124.8 231.5 109.1 118.9 228.0 248.8 Management & holdings**** 4.2 6.4 10.6 2.6 6.4 9.0 9.2 TOTAL 110.9 131.2 241.5 111.7 125.3 237.0 257.0 EBITDA London London 19.5 27.6 47.1 21.6 24.4 46.0 46.0 Margin 35% 42% 39% 37% 39% 38% 37% London art otel Hoxton + Western Ave* - - - - - - 1.0 Leeds + Nottingham 0.6 0.5 1.1 0.6 0.6 1.2 1.3 UK m total 20.1 28.1 48.2 22.2 25.0 47.2 48.3 Exchange rate 1.22 1.24 1.23 1.17 1.15 1.16 1.16 UK m total 24.5 35.0 59.5 26.1 28.7 54.8 56.0 Netherlands** 5.6 6.7 12.3 5.7 7.3 13.0 15.0 Germany & Hungary*** (1.0) 0.5 (0.5) (0.8) 0.5 (0.3) Neg. Owned & leased hotels 29.1 42.3 71.4 31.0 36.5 67.5 71.0 Management & holdings**** 6.1 8.1 14.2 4.9 7.6 12.5 13.0 Total EBITDA 35.2 50.4 85.6 35.8 44.2 80.0 84.0 Depreciation (9.1) (10.2) (19.3) (9.4) (10.0) (19.4) (21.4) Trading profit 26.1 40.2 66.3 26.4 34.2 60.6 64.6 Associate (Croatia) (2.1) (0.3) (2.4) (2.4) (0.1) (2.5) (2.0) Financial expenses***** (13.5) (15.4) (28.9) (14.1) (13.4) (27.5) (27.5) Financial income 1.7 1.1 2.8 1.7 1.3 3.0 3.0 Interest expenses guaranteed to unit holders (5.5) (5.7) (11.2) (5.3) (5.7) (11.0) (11.0) Pre-tax profit /(loss) adj. 6.6 20.0 26.6 6.3 16.3 22.6 25.1 Source: Edison Investment Research. Note: *Due to open in H214 (respectively 352 and 158 rooms). **50% of Victoria, Amsterdam, Utrecht & Amsterdam Airport until 4.12, then 100%, art otel Amsterdam (105 rooms) due to open in Q313. ***Nuremberg (175 rooms) due to open in Q214. ****FY12 includes c 1.8m one-off gain. *****H113 includes 1.0m forex loss (H112 0.3m gain). PPHE Hotel Group 2 September 2013 3
Exhibit 3: Financial summary '000s 2011 2012 2013e 2014e Year end 31 December IFRS IFRS IFRS IFRS PROFIT & LOSS Revenue 202,400 242,100 237,000 258,000 EBITDA 65,000 85,600 80,000 84,000 Operating Profit (before amort and except) 49,100 66,300 60,600 62,600 Intangible Amortisation (2,600) (2,600) (2,600) (2,600) Exceptionals (3,000) 43,600 0 0 Operating Profit 43,500 107,300 58,000 60,000 Net Interest (30,400) (37,300) (35,500) (35,500) Associates (2,500) (2,400) (2,500) (2,000) Exceptionals (3,000) 43,600 0 0 Profit Before Tax (norm) 16,200 26,600 22,600 25,100 Profit Before Tax (FRS 3) 10,600 67,600 20,000 22,500 Tax 4,600 400 0 0 Profit After Tax (norm) 20,800 27,000 22,600 25,100 Profit After Tax (FRS 3) 15,200 68,000 20,000 22,500 Average Number of Shares Outstanding (m) 41.7 41.4 41.5 41.5 EPS - normalised (c) 38.8 64.3 54.5 60.5 EPS - normalised fully diluted (c) 38.8 64.3 54.5 60.5 EPS - (IFRS) (c) 36.5 164.3 48.2 54.2 Dividend per share (p) 6.0 12.0 12.0 12.0 EBITDA Margin (%) 32.1 35.4 33.8 32.6 Operating Margin (before GW and except.) (%) 24.3 27.4 25.6 24.3 BALANCE SHEET Fixed Assets 884,900 1,014,100 1,017,000 1,027,000 Intangible Assets 40,700 38,200 35,000 36,000 Tangible Assets 610,900 762,900 775,000 790,000 Apart-hotel units sold to unit holders 168,600 172,800 170,000 168,000 Investments 64,700 40,200 37,000 33,000 Current Assets 69,700 95,500 72,000 74,000 Construction in progress 7,800 16,400 20,000 10,000 Restricted deposits 3,600 6,000 4,000 4,000 Stocks 1,300 1,300 2,000 2,000 Debtors 16,900 19,700 19,000 19,000 Cash 31,000 46,200 22,000 34,000 Other 9,100 5,900 5,000 5,000 Current Liabilities (57,200) (97,600) (84,000) (75,000) Creditors (50,300) (65,200) (65,000) (70,000) Deposits from unit holders 0 0 0 0 Short term borrowings (6,900) (32,400) (19,000) (5,000) Long Term Liabilities (696,200) (752,100) (774,000) (779,000) Long term borrowings (411,200) (474,400) (500,000) (500,000) Advance payments from unit holders (194,400) (196,000) (194,000) (194,000) Other long term liabilities (90,600) (81,700) (80,000) (85,000) Net Assets 201,200 259,900 231,000 247,000 CASH FLOW Operating Cash Flow 43,800 80,500 77,500 82,000 Net Interest (30,400) (38,000) (35,500) (35,500) Tax (100) (100) 0 0 Capex (11,000) (23,600) (20,000) (14,400) Acquisitions/disposals (6,400) (89,100) (52,300) 0 Financing (13,100) 2,900 0 0 Dividends 0 (6,100) (6,100) (6,100) Other (11,000) 2,900 0 0 Net Cash Flow (17,200) (73,500) (36,400) 26,000 Opening net debt/(cash) 369,900 387,100 460,600 497,000 HP finance leases initiated 0 0 0 0 Other 0 0 0 0 Closing net debt/(cash) 387,100 460,600 497,000 471,000 Source: Company accounts, Edison Investment Research PPHE Hotel Group 2 September 2013 4
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Berlin +49 (0)30 2088 9525 Friedrichstrasse 95 10117 Berlin London +44 (0)20 3077 5700 280 High Holborn London, WC1V 7EE New York +1 646 653 7026 245 Park Avenue, 39th Floor 10167, New York Sydney +61 (0)2 9258 1162 Level 33, Australia Square 264 George St, Sydney Wellington +64 (0)48 948 555 Level 15, 171 Featherston St Wellington 6011 PPHE Germany Hotel Group 2 September United Kingdom 2013 US NSW 2000, Australia New Zealand 5