PPHE Hotel Group Ltd (LON:PPH) reported interim results which were higher than our expectations and we are modestly increasing our forecasts for this year and next. Current profitability is constrained by a combination of cost pressures (labour shortages in London, weak sterling and business rates) and by ongoing renovation in London and Amsterdam which means that full operational capacity will only be achieved in 2019. The group has excess liquidity and is seeking to make investments, which we perceive positively given an outstanding track record. The rating remains extremely low for a company with this record and asset backing.
Interims: The results surprised on the upside in spite of some significant cost pressures from business rate increases, labour shortages in London and the lower pound adding to costs. These will be a drag in H2 and have limited our upgrades. Underlying trends remain positive. 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 recent valuation showed a huge uplift, before the Waterloo deal. The real value is c.£18 per share with further upside in prospect. Hence the current discount will widen unless the shares perform.
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 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 we believe the multiples, especially on price:book, are too low for a company of this quality and with its record.
