PPHE Hotel's discount is too wide

PPHE changed its name from Park Plaza Hotels in February to distinguish itself from the Park Plaza brand and to give more attention to its other two marques - art'otel, to which it holds the worldwide brand rights, and Arenaturist, a small Croatian resort business.

The company owns most of the 38 Park Plaza and art'otel hotels outright or with majority stakes and leases eight on long-term contracts. It also earns management fees for running the Arenaturist resorts, while holding a 20 per cent equity stake in the Zagreb-listed owner. Yet PPHE is more a developer than an operator, leveraging its asset-rich balance sheet to grow. Its largest asset, a striking Park Plaza building that stands at the foot of London's Westminster Bridge, opened in 2010. It plans to roll out three Park Plazas in Croatia this year and three more hotels across Europe in 2013. The company also has a couple of projects in Thailand.

The result is a business with strong asset backing, but £310m-worth of debt. Even so, subtract all that debt and PPHE still has assets of £161m. Herein lies the opportunity: £161m is almost double the stock market value of the equity. Moreover, the hotels are held on the balance sheet at cost - €611m in total. A recent revaluation by Savills and Collies suggested their open-market value would be €722m. Add the surplus into the mix and underlying net asset value is clear of 600p. The shares don't look expensive on the earnings side, either - on a multiple of seven times 2011's profits.

This lowly rating reflects a number of problems. For a start, the company has hotels in the eurozone, suggesting it is a play on the euro. But it isn't - 69 per cent of its cash profits came from the UK last year, the first that included a full year's trading at Park Plaza Westminster Bridge.

A more intractable problem is that the shares are illiquid. PPHE, then Park Plaza, was formed in 2007 by combining two family businesses that still own about 65 per cent of the equity. The free float is consequently too small to interest most institutional investors. The upside of this is that the company's bosses are motivated to raise the share price. They have recently moved the quote to London's main market, bought back shares and started paying dividends in a bid to catch investors' attention.

That's presumably because the most important reason why the shares are lowly rated is the double-dip recession. For all hotels, their fixed costs mean their performance is highly geared to economic growth. For PPHE the risks are magnified by its development-led growth and its debt.

But it may pay to be sanguine. The company seems to have little trouble raising debt and no major loans are due until 2015. As important, PPHE's operational performance has been impressive, with average room rates growing by 7.6 per cent last year (9.7 per cent like-for-like) with no increase in vacancies. Year-on-year growth moderated to 4.9 per cent in the first quarter, but remains robust. High exposure to buoyant London has helped - but even the London Park Plaza hotels appear to be outperforming their peers.