Small Cap Value Report (10 Apr 2017) - SSTY, CER, ESP, PHC

10th Apr '17 by Graham Neary

10 comments 10854 reads

Afternoon everyone,

It's not too busy in RNS-land, and Paul is feeling under the weather, but let's see what we can do here today!

Regards,

Graham

Safestay (LON:SSTY)

Share price: 53p (+1%)
No. shares: 40.7m
Market cap: £18m

Final Results

A reduced loss from this provider of "premium hostels":

Strong uplift in revenues to £7.4 million (2015: £4.0 million) reflecting demand for Safestay's unique contemporary hostel offer and full year contributions from Edinburgh and Holland Park

EBITDA of £2.2 million (2015: £0.7 million)

Reduced loss after tax of £0.5m (2015: loss £0.6m)

The concept, as one might expect, is to compete directly with budget hotels, primarily on price ("just under £20 per night").

The level of occupancy appears questionable - almost 300,000 bed nights were sold in the four hostel properties, which have 1,526 beds in total. Based on all of those rooms being available for 365 days a year, which as far as I can tell was the case, that's a 53% occupancy rate.

Edit: I've been helped by a commenter, who points out that the Edinburgh hostel is shared with university students. From the 2015 Annual Report:

The property has 272 hostel beds throughout the year,a licensed stand-alone food and beverage business trading as Bar 50 and leases 81 rooms to the University of Edinburgh for the academic year September through May. For the months of June, July and August the student rooms are converted to hostel rooms increasing the capacity to 615 beds which complements the surge in accommodation demand Edinburgh enjoys each summer.

If I adjust for this, my new back-of-the-envelope calculation is that occupancy was 65%.

According to PwC, occupancy in the hotel industry was 76% last year.

I suppose one could argue that since three of the properties were either bought or refurbished in mid- or late- 2015, that they have not yet had a chance to build up their reputations and attract repeat business. So hopefully the occupancy rates can improve to more impressive levels!

Outlook

Positive bookings trends, according to the Chairman:

We are continuing to generate efficiencies in the business by consolidating our Group purchasing wherever possible and improving our management structure. Our bookings pipeline for the coming year is encouraging with cash received in respect 2017 revenues as at 31 December 2016 up 51% over the corresponding period in 2015, which underpins my belief that…

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Boon

10th Apr '17

Graham, for Safestay (LON:SSTY), working out available room nights is not as simple as taking the bed nights and multiplying by 365.

The complication is the Edinburgh hostel, which is rented out during the academic year as student dorms. I don't think they count those nights in revenue or room nights. From my understanding, Safestay only gets the rooms during the summer?

I might be wrong, and would love for someone to shed more light on their Edinburgh hostel!

Graham Neary

Thanks very much, it sounds like some rooms are under that arrangement - I'll edit the report to reflect this.

trufflehunter

what the market has missed with Safestay is the arrival of PYRRHO INVESTMENT LIMITED on the register
Pyrrho is the family investment fund owned by a Hong Kong based property investment and development family. they are keen activist investors and now have 22% of the stock.
clearly they are not here for the sunshine and an improvement in occupancy drops straight to the bottom line.

Tortoise investor

From memory most of Empiric Student Property (LON:ESP) 's students are from Asia and here for postgraduate study. They are the types less affected by tightening of migration controls as they pay their way and earn universities' money. I sold out of Empiric Student Property (LON:ESP) though because the NAV increases have been pedestrian. Personally I think there are better opportunities elsewhere that also provide a decent dividend and better NAV uplift such as Palace Capital (LON:PCA) or £BBOX

langley59

I keep looking at Empiric Student Property (LON:ESP) as a potential long term income paying hold but I just can't see the dividends being covered by the net rents, which would give me comfort. I would not want to rely on the NAV going up.

peterg

I've argued before that foreign students, who make up the majority of Empiric's tenants, are likely to continue to study in Britain, regardless of Brexit. Especially the ones who can afford private accommodation in prime locations such as Empiric's: I would lean heavily toward the idea that visas will still be made available to these types.

I would tend to agree that European students would be likely to continue to get visas post Brexit (though that's by now means certain - recent governments have a poor record on understanding the scale of the foreign earnings brought into the country by overseas students).

However, visas are not the only issue. EU students can currently get funding for studying in the UK. I very much doubt that would continue in any likely Brexit deal.

It would be a mistake to assume that Brexit will have little or no impact on overseas student numbers.

xcity

Very unlikely that the UK would continue to fund the university education of EU students here, but losing that cost would enable slightly cheaper fees for non-EU overseas students, which might offset any drop in demand for Empiric's properties.

gsbmba99

11th Apr '17

The Cerillion (LON:CER) CEO, Louis Hall, did a segment on Share Radio with Lord Lee. The interview can be accessed here (https://www.shareradio.co.uk/podcasts/my-portfolio-with-lord-lee-cerillion-15-mar-17/PodcastPlayer).

seadoc

langely,

Empiric Student Property (LON:ESP) is a REIT so nearly all the rent received has to go out as dividends. The management make more money by weekly extras (like laundry and food boxes). This is not income to REIT and goes straight into the pockets of directors of the "extras company" who happen to be the same as founders and significant shareholders and from memory also some overlap with directors of Empiric Student Property (LON:ESP) I have about 20% of my retirement fund in specialist REITs: Education, (ESP UTG UTG1) Health (PHP) and biggest individual holding is Tritax Big Box Reit (LON:BBOX) specialist distribution centres. If I were to do the "Desert Island Disc" choice I think I would keep Empiric Student Property (LON:ESP).

N Harley

12th Apr '17

Hi Paul Really enjoy reading your notes - always very interesting. It would be great if you could attach a list most days of your high conviction calls - would this be possible? Many thanks

Small Cap Value Report (10 Apr 2017) - SSTY, CER, ESP, PHC

Safestay (LON:SSTY)

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Graham Neary

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