PPHE Group - Park Plaza Hotels - 70% discount to peers

PPHE Group (LSE:PPH) http://www.pphe.com/

Current price 236p, Full LSE Main Market listing. Market cap £97 million. Annual dividend 12p, yield 5%.

PPHE Group operate 4* hotels in London and European hub cities. These are run through three different brands, Park Plaza, Art'Otel and Arena Turist.

Investment thesis:

> Income - Current yield ~5%
> Value - Significant discount to peers IHG, WTB, MLC (on P/E, Price to cashflow, yield and price to book)
> Growth - Improving trading conditions and growth in store, Quarterly growth, new hotels in pipeline
> Board looking to unlock equity in properties
> Resilience of the travel and leisure sector in 2012


Valuation:

The main basis for my valuation is based on comparison to peers within the hotel/ leisure sector. Intercontinental Hotels (IHG), Whitbread (WTB) and Millenium and Copthorne (MLC).


Company P/E Yield (%) Price to cashflow Price to book

As the data above shows, PPH is significantly undervalued compared to its peers.

If yield was to normalise to around 3% this would see the share price have to rise to around 400p.

Again normalisation of the p/e to around the industry average 12-14x earnings would see the share price appreciate to 364-420p.

Yet whilst these comparisons are quite crude they give us a good benchmark with regard to the sector itself and other London listed hotel groups.

Of concern to some investors is the level of the debt that PPHE Group carries. Currently PPHE has around €477mil of debt, yet is well within its covenants. Net equity gives a better view of the situation, with assets - liabilities giving shareholder equity of €200 mil or approximately 395 pence per share. NAV per share as of June 2012 was €6.07 or 494 pence per share.

Looking forward the business looks healthy and is growing rapidly. PPH continually posts quarter on quarter growth. Additionally trading has been ahead of expectations with the company stating in its November IMS:

"Our performance to 30 September 2012 has been encouraging and with the significant renovations completed earlier this year at several of our hotels, we anticipate further performance improvements ahead. As a result, the Board expects the full year results to be ahead of Company expectations."

The jewel in the crown for PPHE Group are the London hotels, the NAV update in June 2012 did not include a revaluation of the London hotels which is expected to come. Management have also indicated that they will look towards deals as a way of realising value within the asset base and increasing shareholder value.

Nice 6 month uptrend --- PPH in play:

Conclusion:

I do not feel that the discount to the sector is justified. Whilst debt levels are high, this has been utilised to the PPHE's advantage for rapid expansion. Debt is well within covenants and trading conditions are excellent. PPHE Group's hotels are relatively insulated from the European crisis given their prime locations, London and other European hubs.

Not only does PPHE look cheap on its own, the discount to peers on a variety of metrics reinforces the value on offer in PPH. Over the next 3-6 months I am bullish on the stock. Technically the stock is in an uptrend too which should lend to some positive momentum.

Investec rates the stock a buy, with a 330p price target.