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easyHotel promises high-return growth

The budget hotel chain looks primed for the summer months as it looks to continue expanding across multiple regions
June 1, 2017

The rapid rollout of a "super budget" hotel concept provides an exciting case for buying shares in easyHotel (EZH). Using the familiar orange and white easyGroup brand, most famously sported by budget airline easyJet , easyHotel has established an estate of 25 owned and franchised hotels across 16 cities in eight countries. The company's experienced management has ambitious targets for expansion that should create significant value for shareholders based on its target of generating returns on capital employed of 15 per cent.

IC TIP: Buy at 94.5p
Tip style
Growth
Risk rating
Medium
Timescale
Long Term
Bull points
  • Strong growth
  • High occupancy rates on opening
  • Well-financed
  • Exploiting strong brand
Bear points
  • Pre-tax profits down on expansion costs
  • Inflation squeeze on wages

Over each of the past four quarters, easyHotel has reported revenue per available room (RevPAR) growth - a key industry performance metric - around a fifth better than the sector, which suggests its "super budget" concept, along with the easyGroup branding, is resonating well with customers. Meanwhile, new hotels have filled up quickly, with three openings in the six months to the end of March achieving occupancy of about 85 per cent.

 

 

The group's expansion is being overseen by chief executive Guy Parsons, who previously ran Travelodge. As well as developing owned hotels, the group is using the management systems it has developed, along with the branding, to support a franchise operation. In the first half, like-for-like owned-hotel revenue growth came in at 17.4 per cent, and there was a 6.8 per cent like-for-like increase in franchise fees. Total revenue in the period was up 21.2 per cent to £3.14m, while so-called system sales (the total of revenue from owned hotels and all sales at franchise hotels) grew 24.7 per cent to £12.1m.

In the past four weeks, two hotels - one owned and one franchised - have been opened. Meanwhile, the pipeline of development projects now includes 1,837 rooms under development, 601 of which are owned and 1,236 being developed by franchise partners. The development of 2,000 further owned rooms are under negotiation, of which 700 have board approval, as well as 1,000 franchise rooms.

Importantly, the company is well funded for growth following an equity placing last October that raised £38m. The company also has two loan facilities of €8.3m and £7.2m. All in all, after taking account of £16.8m already committed for investment, easyHotel has £26.4m of firepower for further expansion. And if the company can achieve its targeted 15 per cent return on capital employed, there is the potential to create substantial upside from this growth.

Reported net asset value (NAV) is yet to properly reflect the achievements to date, but shareholders could get a taste of the value being created should the company go down the route of selling one of its properties in Old Street. A strategic decision is currently being made on this property after the company's overexuberant development activity got it in trouble with planners. Even though the price achieved on a sale could well prove a silver lining for shareholders, hopefully easyHotel has also learned its lessons from this episode.

EASYHOTEL (EZH)
ORD PRICE:94.5pMARKET VALUE:£ 95.0m
TOUCH:92-97p12-MONTH HIGH:99.5pLOW: 71p
FORWARD DIVIDEND YIELD:0.3%FORWARD PE RATIO:98
NET ASSET VALUE:69pNET CASH:£24.8m

Year to 30 SeptRevenue (£m)Pre-tax profit (£m)*Earnings per share (p)*Dividend per share (p)
20143.51.213.1nil
20155.50.901.20.30
20166.01.201.50.30
2017*7.90.900.70.30
2018*12.61.601.20.30
% change+59+78+71-

NMS:3,000

Matched Bargin Trading

BETA:0.40

*Investec forecasts, adjusted PTP and EPS figures