I first recommended buying the shares at 85p ('Check in for a profitable booking', 14 December 2015), recommended running profits at 95p ahead of a trading update ('A profitable booking', 14 April 2016), and having run through the first-half numbers advised running profits at 100p (‘easyHotel ramps up opening plans’, 25 May 2016).
The first-half results certainly delivered a positive statement from management. In fact, trading was better than analysts had expected, driven mainly by an 8 per cent rise in underlying revenues at the company's three UK-owned hotels. These have a total of 390 rooms and are located in Croydon, Glasgow and in Old Street, on the fringe of the financial centre in London. Revenue per available room rose almost 10 per cent to £25.40 on a weighted-average basis, highlighting the early benefits of using a dynamic pricing model and the release of a proportion of the hotel stock to online travel agencies. Pre-tax profit (before central overheads) from these owned hotels increased a fifth to £810,000.
There was upbeat news on the development pipeline too. Chief executive Mr Parsons says that the committed, owned and franchise pipeline is expected "to add more than 1,000 rooms to the network over the next two years". easyHotel currently has 390 owned hotel rooms and a further 1,490 rooms at 18 franchise hotels. In the first half, the company invested £4.6m in five owned development projects of which four hotels (Liverpool, Manchester, Birmingham and Ipswich) will add 374 bedrooms and double owned hotel capacity by June next year. The fifth opening, a 204-room hotel in Barcelona, the 12th most visited city in the world, is scheduled for early 2018. Moreover, with more opportunities available than had been expected the board is looking to scale up its opening schedule to leverage its strong brand and increase easyHotel's presence in the growing branded super budget hotel segment.
Seriously undervalued
However, after a bout of profit taking the company's equity is now only being valued at £50m even though shareholders' funds of £32.5m includes net funds of £10.4m and property assets with a book value of £25.3m. The Glasgow, Croydon and Old Street hotel on the edge of the financial district in London have a combined book value of £21m, a conservative valuation given that analysts believe the redeveloped Old Street hotel is worth between £20m and £25m alone. It's in the accounts at £14m and was last valued at £18.6m in June 2014. Or put it another way, mark property to market value and the company's adjusted net asset value could be nearer £43m, or 69p a share.
And that calculation is being brought into focus right now. That's because having put in a retrospective planning application for 78 of the 162 rooms easyHotel redeveloped at the Old Street site, Islington Borough Council has refused the application. easyHotel is appealing the decision and this process is likely to take at least six months. It's worth noting that the company had previously been granted planning permission to convert the building into a hotel on appeal in 2011. But even if it loses the appeal then it’s hardly a big deal because I understand from analysts that the site alone is worth at least £20m to a property developer, or £6m above book value, and perhaps as much as £25m. So, if the company sells the site it will free up significant cash to recycle into the hotel development programme. It will also highlight the hidden value in the balance sheet.
I would also flag up that the share price weakness in the past month could be partly attributed to economic uncertainty in the run up to the EU Referendum. The sharp rise in share prices yesterday on a shift in the polls to the Remain campaign highlights the potential for shares in heavily oversold leisure companies to bounce back strongly. Frankly, irrespective of which way the vote goes on Thursday, easyHotel's shares are being seriously undervalued at this level and offer 50 per cent upside to Liberum Capital’s 120p fair value estimate, and even more upside to Investec Securities recently raised target of 130p (up from 120p). They are also massively oversold with the 14-day relative strength indicator in single digits, highlighting the potential for a strong bounce at the very least.
On a bid-offer spread of 78p to 80p I upgrade my recommendation to buy.
Please note that I have published three columns today, all of which are available on my IC homepage.
