1 - Because PPHE is both a Property Company and a hotel Operating Company it can flexibly to maximise values in the business. Ie conflict between the two operations is minimised and developments occur to maximise value.
2-These site developments create significant levels of value, well above book value. So whilst NAV is £361m against a market cap of £648m the underlying EPRA NAV is £1,038m. This business has a big margin of safety.
3-The ability to develop sites and create substantial extra value allows the group to fund growth without coming back to shareholders for cash. In fact it has allowed for special dividends in the past. In its accounts the Group claims £117m of excess cash.
4- When compared to NAV bank debt can look high this is significantly less when market value of the assets is taken into account. Per the accounts "The Group's gearing ration based on reported book value increased to 51.1%. The Group's gearing ratio with the Group's properties at market value amounts to 28.9%"
5-PPHE has been doing this for years and there is little to suggest that it cannot continue to do this going forward.
Not everything is perfect. There are ongoing issues with the hotels, room rates rise and fall as does occupancy. PPHE does not control the markets but it does have a history of delivering results above average performance.
The Group itself has cited staff recruitment post Brexit in its London operations as an issue. It is not just a matter of raising pay, just finding applicants is an issue.
In the last couple of years the Group has taken control of Arena a Croatian operator largely focussed on the summer camping market. They have incorporated their Hungarian and German operations into Arena and developed Arena’s hotel offering in Croatia. They have also moved one of the campsites to a glamping format. Initial indications, particularly with respect to the hotel operations are positive, but the main season for camping is post these results.
There are a number of operational gains to be had from all these changes, not least staff training of Croatian staff at the already prepared German and Hungarian operations, but from a PPHE perspective a development in Croatia takes the same amount of key staff time as a development in Holland, but we get only 51.7% of the benefit as Arena is listed in Zagreb and PPHE has only 51.7% of the shares.
One factor that I think may hold back PPHE’s valuation is the reality, that as the big asset gains come from redevelopment, it (a) needs to find developments to take on and (b) these are going to be lumpy in completion. Meaning the GAAP results are very variable depending on when realisations occur and the EPRA results can equally vary as sites are delivered.
In part I think the Arena deal was an opportunity to acquire in one act a number of sites to develop over time.
With regard to specifically the 30 June 2018 results;
The hotel operations continue to do well. The company itself describes them as solid. Which in reading the detail means that where the group has opened redeveloped rooms they are being filled and where redevelopments are being conducted and the number of rooms available lessened the results have been lower. There was also some slight track back on metrics with traveller numbers.
Dividends are up 45%. Probably reflecting the excess cash mentioned earlier and a new development will be occurring in London Hoxton. The company particularly mentioned the opportunity to redevelop sites in Croatia and Germany.
The company has moved from a Standing listing to a Premier Listing on the London Stock Exchange
The company gave EPRA NAV as £24.21 against a Current Share price of £15.30.
I would mention that if you go back a few years the company used to simply say that its redevelopments added value to the site. Then it began to tie individual sites to redeveloped values. (But if you wanted a more global understanding you had to call up the company and speak to the FD). Then it introduced a small note to the account laying out NAV to Market revaluation. And now it has complete pages and multiple references to EPRA NAV and how it calculates it.
Readers should therefore be aware that PPHE has been making its asset undervaluation increasingly clear for some time. Though I do not think it is as widely realised as the company hopes to get it. (I have asked the company and the move to a Premier listing seems to be part of this). Also in my experience one should not expect a company to trade at par to EPRA NAV without substantial activity or substantial regular profits. PPHE is still too small for this. But given all of this, its history of success and its consistent direction of travel I am looking for the gap to narrow to a lower discount and for the EPRA NAV and NAV figures to continue to grow.
Sharepad calculates the EPV as £875m and with all of the above I think this share continues to show a substantial margin of safety to underlying value at its current price.
Full disclosure I hold PPHE and have recently amended my portfolio boundaries and as such may be a buyer of PPHE in the next few days. So any short term weakness in the price would be appreciated.