PPHE Hotel Group bounces back

Tuesday, Sep 01 2015 by
PPHE Hotel Group bounces back

The hotel industry is cyclical with room rates and occupancy levels falling back in a downturn. New hotel supply exacerbates this trend with hotel completions picking up just as a recession takes hold. We are now in the upturn of the cycle and as such PPHE Hotel Group is reaping the rewards.

Companies with cyclical demand and financial leverage have vulnerable business models. This has proven to be the case for a number of banks, real estate developers and ship owners in the post 2008 downturn.

The hotel sector is cyclical with room demand driven by underlying economic conditions. The key metric followed by the industry is revenue per available room (RevPar) which is driven by occupancy and room rates.  

Taking the US hotel industry as case study and RevPar fell back in 2008 and 2009. This was exacerbated by strong annual new hotel supply being delivered in both of those years due to strong hotel construction started before the downturn.

US Hotel industry case study: Demand / Supply and RevPar


Source: Hilton Worldwide investor presentation

PPHE Hotel Group has seen similar trends with hotel occupancy falling from 82.4% in 2007 to 79.1% in 2009. Room rates fell from €118.8m in 2007 to €97.8 in 2009 and as such RevPar was down from €97 in 2007 to €77.4 in 2009.

The effect on revenue was that it fell back from €97m in 2007 to €80.3m in 2009 while EBITDA profits fell from €28.4m in 2007 to €16.2m in 2009. Net debt, meanwhile, rose from €86.5m at the end of 2007 to €403.9m at the end of 2009.

Against this backdrop it is understandable that the shares fell back from over 500p in 2007 to less than 50p in 2008. Operating conditions, revenue and profits have been on an improving trend since 2009 and the shares have rebounded.

PPHE Hotel Group’s share price slump and rebound  

PPHE in focus

PPHE Hotel group is majority controlled by its founders Mr Eli Papouchado (77) and Mr Boris Ivesha (69) which makes the shares illiquid. Mr Papoucahdo is the non-Executive Chairman and Mr Ivesha is the President & CEO.

Both executives have a long history in the hotel industry and have been with PPHE Hotel Group for decades. New blood is now coming through in the form of Deputy CEO and CFO Chen Moravsky (44).

In 2014…

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PPHE Hotel Group Limited is a hospitality company. The Company, through its subsidiaries, jointly controlled entities and associates, owns, leases, operates, franchises and develops upscale and lifestyle hotels in gateway cities and regional centers in Europe. The Company's activities are divided into Owned Hotel Operations and Management Activities. The Owned Hotel Operations are divided into three segments: the Netherlands, Germany and Hungary, and the United Kingdom. The Company's portfolio of owned, leased, managed and franchised hotels includes approximately 39 hotels offering over 9000 rooms. The Company's development pipeline includes approximately five new hotels and the extension and reconfiguration of one hotel. The Company's hotels operate under brands, which include Park Plaza Hotels & Resorts, art'otel and Arenaturist in Europe, the Middle East and Africa. It owns and operates hotels, restaurants, bars and spas across various countries in Europe. more »

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6 Comments on this Article show/hide all

PhilipHanson 1st Sep '15 1 of 6


This is a good analysis and I have a high level of conviction on PPHE Hotel (LON:PPH) ver the next couple of years. If they can get a sale and leaseback type deal away to demonstrate the value of the properties, it will help. It's also worth pointing out that these guys are excellent hoteliers and their properties are very well rated on e.g, Tripadvisor.

Reporting in Euro when the majority of revenue, profit and assets are in GBP creates some problems but they're not insurmountable. Do note the quoted yield on Stockopedia is too low as it's showing dividends as 20c whereas they will be 20p, so yield is over 3% currently.

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Andrew L 1st Sep '15 2 of 6

ragehammer -

The company was started in Holland I believe or at least they are headquartered in Amsterdam.  This explains the reporting currency being the euro  But two-thirds of profits are from the UK and this will grow over time.  We should have over 70% of profits from the UK in a few years.  This effectively means that the currency being in euros makes no difference for those profits.  I.e. it is translated into euros from sterling but that is just cosmetic as UK investors only care about the value of the profits in sterling terms so will translate it back into sterling.

I take your point about the sale and lease back but effectively they report the estimated market value of their hotel assets every year.  This is because they give the estimate of debt to total assets at market value.  So you can work back from that to get the market value of the hotels versus the book value. 

Clearly this isn't a property company per se so they don't get a reported valuation every year as a property company would do.  They also don't detail the approach to getting the market value of the hotels as far as I can see.  However, the asset value of the property is another string to the bow of the investment case.  If this was just a real estate group people would argue that it is at a large discount.

Agree that they appear to be good hoteliers.. especially focused on affordable style.  So not bland hotels but nothing over dramatic in terms of styling and not too costly...some good locations in London...founders have decades of experience in the industry... 

Happy guests are definitely critical as they mean more repeat visitors....if you look at their last presentation they achieved record levels of guest satisfaction in 2014... and also a improved service performance.... employee satisfaction was also strong... taken together this should generate strong employee and customer loyalty to the hotels in what is afterall a service industry... see page 30 of the presentation below:


On the yield it appears to be 2.6% forecast for this year and 2.8% for 2016.  Worth pointing out that this is very well covered at over 3.5X in both years..Risks is the gearing level but if PPHE can survive the 2008 financial crisis....

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Andrew L 2nd Sep '15 3 of 6

One thought on the sale and leaseback idea to release value and this makes the business more vulnerable. This is because fixed payments on the leases would have to be made in a downturn... the mix they have at the moment of some owned and some leased hotels seems about right....also helps make the stock a long-term asset play... if you do sale and lease back you give the long-term asset upside to someone else...

If this wasn't majority founder controlled then activist investors might call for a sale and leaseback to "boost shareholder value".... however, it may doom the business when the next recession hits.

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PhilipHanson 2nd Sep '15 4 of 6

Not sure that makes sense. The debt they're holding against the properties is also fixed payments that would need to be made during a downturn. The difference is that the asset values would decline. Moving to an asset light model, a move that for exapmle InterContinental Hotels (LON:IHG) has recently made, removes both the upside and downside of owning property and associated debt from the business. Almost all businesses have to lease their premises so there's no real additional risk to PPHE Hotel (LON:PPH) from doing this and it certainly doesn't make them "more vulnerable".

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PhilipHanson 2nd Sep '15 5 of 6

On the dividend yield, they're paying an interim of 10p per share (last year 9p) and the final dividend was also 10p per share, so I would expect at least 20p this year, hopefully 22p (with a final 12p dividend). Even on 20p the yield on today's offer price of 670p is 3%.

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Andrew L 2nd Sep '15 6 of 6

ragehammer - I think the difference is that in a sale and leaseback all of the property is financed through this method... with debt financing the company puts in a certain amount of equity and uses debt for the rest.... so the sale and lease back I think would be more onerous.... I think the assumption you maybe making is that when they own the hotels they are almost 100% debt financed which doesn't have to be the case...also I think issues with debt holders may be less pronounced than with lessors....i.e. debt holders would be more open to negotiation...

IHG has moved to this asset light model but I am not sure on that... Accor for example has rejected it citing the need for quality and motivating staff etc... also in the case of IHG if the value of the properties go up over time.. as they surely will do... then shareholders don't benefit....IHG looks great on paper to investors due to high returns on capital, low risk, ability to grow etc..i.e. it is a franchise type business...however, I think owning hotels as part of the mix can also be beneficial...PPHE has different parts of the mix with some hotels fully owned and some partially owned...certainly PPHE is delivering in terms of customer satisfaction using its current model and for a hotel business customer satisfaction is key...

Probably I am slightly biased against sale and leaseback as a business model.... it is beloved by private equity and activist investors as a means of releasing capital... however, it can put significant pressure on a business in difficult times...as I understand Woolworths in the UK did a similar approach and wasn't able to survive the downturn as a result.....

Dividend - you are probably right on this...I just go by consensus estimates from Reuters Knowledge

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