In his first six months in charge, the company has been granted planning permission for a 116-room easyHotel at Bradley House in Manchester and a 77-room owned hotel at 47 Castle Street in Liverpool. Both freehold properties have been purchased and are scheduled to open in April and January 2017, respectively. The cost of the sites and hotel conversion costs are around £9m. In addition, easyHotel has conditionally acquired the 125-year leasehold interest of 81-91 John Bright Street in Birmingham, subject to obtaining planning consent for a hotel. The property is situated in the heart of the city centre, close to the new entrance to Birmingham New Street Station and within 500 metres from the Bullring shopping centre, so is well located. The company plans to convert the building into an 84-room easyHotel at a total cost of £4.5m, including the purchase price of the site, with a planned opening date of March 2017.
Three months later and expect a 94-room easyHotel in Ipswich to open, subject to obtaining planning consent to convert a Grade II listed property situated adjacent to the principal retail area into a hotel. The company plans spending around £4m, or £43,000 per room, on the building and site conversion costs.
This growing pipeline of new hotels highlights the huge potential to ramp up the opening programme, a key factor that attracted me to the company in the first place when I recommended booking into the shares at 85p ('Check in for a profitable booking', 14 December 2015). Since then the board has also announced plans to open a 200-room hotel in Barcelona, the 12th most visited city in the world, in early 2018. The site is located on Gran Via, the main avenue of L'Hospitalet de Llobregat, with easy access to the city centre and Barcelona Airport and within walking distance of the Fira Barcelona Gran Via convention centre, and the Gran Via shopping centre, which has 180 shops, 24 cafes and restaurants, and a 15-screen cinema. Subject to planning permission, the total investment here will be about €15m (£11.3m) ('easyHotel ramps up expansion', 14 January 2016).
In addition, its Benelux franchisee has purchased a property on Arena Boulevard in Amsterdam, one of the top five most visited cities in Europe, which it plans to convert into a 131-room easyHotel. After factoring in the development of this hotel and the 107-room easyHotel in Brussels, the company's Benelux franchisee is set to add 238 rooms to the network within the next 12 months. It is seeking further sites for hotels in the Benelux region too.
Profitable and expanding
The key point is that easyHotel is already profitable, so is in a strong position to accelerate the roll-out programme both in the UK and overseas. Its three owned hotels in the UK generated pre-tax profits before central overheads of £1.76m in the 12 months to end-September 2015. And there is consumer appetite for the brand as I understand the owned hotels, which have a total of 390 rooms and are located in Croydon, Glasgow and on the fringe of the financial centre in London, were the key driver in easyHotel posting like-for-like sales growth of 8 per cent in the six months to end March 2016, a performance ahead of management’s expectations. The 18 franchised operations across Europe posted a profit of £880,000 before central overheads in the last financial year, so are profitable too.
Moreover, because the company has a rock solid cash rich balance sheet then it has funds available to finance the early stages of the hotel opening programme. EasyHotel had cash of £22.6m on its balance sheet at the end of September 2015, and bank borrowings of £7.2m. It also owns property with a book value of £21m, being the Glasgow, Croydon and Old Street hotel on the edge of the financial district in London. These are conservatively valued because analysts believe the redeveloped Old Street hotel is now worth between £20m to £25m. It's in the accounts at only £14m and was last valued at £18.6m in June 2014.
There is hidden value in the Croydon site, too. That's because easyHotel was granted a lease of the Croydon property for a term of 999 years and at a nominal initial rent of £25 per annum upon payment of a premium of £1.6m. The company then spent £1.9m on developing the 103-room hotel that is located next to East Croydon railway station. The 125-room hotel in Glasgow site is in the books for £2.75m.
Franchise operation undervalued
I believe these three owned hotels could easily have a market value of £31m, or £10m more than their book value in the accounts. This means that after factoring in cash on the balance sheet the franchise operation is in effect being attributed a valuation of £12m in the company's current market valuation of £59m despite the fact that the operation made full-year pre-tax profits of £880,000 before central overheads in its last financial year.
It’s growing too as the company has entered into a partnership agreement with MAN Investments LLC, a UAE-owned commercial and investment group, to develop easyHotels in the Middle East with a focus on new developments in the UAE and Oman. The new easyHotels are expected to comprise new purpose-built assets and conversions of existing hotel or office buildings. Initially, the development programme will target an opening of 600 rooms next year with easyHotel entering into a franchise agreement for each hotel. MAN Investments has already secured land or properties which will accommodate those openings and its first hotel is a 300-room easyHotel built in the Bur Dubai area of Dubai, widely recognised as being the trading hub of Dubai and the UAE.
I would also flag up that if you mark property to open market value, the shares are only trading on 1.4 times book value, hardly a punchy rating for a company that’s already profitable and has strong pipeline of projects to create significant value for shareholders over the next few years. In the circumstances I feel that the shares could easily take out my initial target price of 100p and would recommend that you run profits at 95p ahead of the forthcoming half year results and the next trading update.
