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Fat Prophets Hot Stock: Mantra

Monday 18th September 2017

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The share price of accommodation operator Mantra Group (ASX, MTR) has picked up over the past few months, and despite some well documented strength in the Australian dollar, which is now above 80 cents versus the greenback. Sentiment has been boosted by a strong full year result, along with further acquisitions to drive growth. 

The fact of the matter is though that currency strength in the A$ versus the currencies of two of the company’s (and Australia’s) most important visitor markets (Japan and China) has been relatively constrained.

What’s new?

Mantra Group’s result at the end of August was a reasonable one in our view, Group revenues rose by 13.7 percent to $689 million during the year, bolstered by the purchase of six hotels. Underlying net profit after tax rose 14.2 percent to $47.2 million. The number though was below February guidance of $48.5 million to $52.5 million, and saw the shares close down 2 percent on results’ day, and after falling as much as 6 percent during the session. 

Pre-tax earnings of $101.2 million were at the bottom end of guidance, but we believe that investors have since appreciated that given several headwinds (the Dreamworld catastrophe and Cyclone Debbie) the numbers were positive on a number of levels. 

A number of key metrics displayed positivity, with occupancy, average room rates, and average revenue per available room (RevPAR) increasing 1.8 percent, 3.6 percent, and 5.5 percent respectively. Should momentum here be maintained, this bodes very well for future earnings gains. 

At the segment level, the resorts segment was a standout performer with a 29.5 percent gain in revenues to $316.2 million. Earnings here leapt 31 percent to $45.6 million.  CBD turnover was more static in comparison, up 1.6 percent to $316.6 million, with strength in Sydney, Canberra and Melbourne, offsetting weakness in the more resource concentric cities. 

The strong performance in the resorts unit was also encouraging given the disruption caused by the Dreamworld accident, and Cyclone Debbie.  A host of metrics turned in strong performances, with a lift in occupancy, average room rates, and RevPAR. The latter was also positive across all key regions.  

The Gold Coast will be a key market for the company medium-term, with the Commonwealth Games in April next year. The region accounts for almost a quarter of the company’s 16,500 hotel keys under management, and as CEO Bob East notes ‘will be pivotal to Mantra delivering operating earnings in the current financial year at the higher end of its forecasts of $107 million to $115 million.’ Game on!

With respect to the CBD unit, there are certainly some pockets of weakness, and notably the likes of Perth, Brisbane and Darwin, although again, if we are right on the resource sector turning around, these regions should improve.  Encouragingly, margins have nonetheless been maintained at 14.8 percent. 

Outlook

We also think that Mantra will benefit from a robust development and acquisition pipeline. The company is focussed on further expansion in Australasia, and in August acquired more than 1000 rooms with the Art Series hotels for $52.5 million. There is also the potential to acquire any new hotel developments under the Art Series brand. 

The company’s acquisition of the 1176-room Ala Moana hotel in Hawaii also looks to have been a good call, with the asset performing strongly. Occupancy has improved by 5.7 percent since Mantra took control.

Management are not resting on their laurels, with a strong pipeline of property additions having either been scheduled or targeted. The company also has the financial firepower to support this ambition. Cash and cash equivalents at 30 June 2017 totalled $62.9 million, with net/long-term underlying earnings of 0.7 times. Interest cover was more than 20 times at 30 June 2017.

Price

Sentiment has also improved on the price charts, with Mantra having broken above both the 50 and 200 day moving averages. In order for the long-term technical outlook to improve further, a decisive break above resistance situated at the July high of $3.22 is required. Should this scenario unfold, then the formation of an uptrend would be deemed to have evolved, and bring prices above $3.60 into play. 

Worth buying?

A strong full year result, and indeed a rise in average room prices in the resorts segment in our view provides further evidence that the threat of disruptors (such as Airbnb) is overstated. The ability to display pricing power also underlines Mantra’s high quality, differentiated offering and strong brand. 

We believe that the stock offers excellent leverage to robust tourism markets. With strong growth on offer, the FY18 earnings multiple of 17 times (dropping to 16 times in FY19) is undemanding in our view. The stock also comes up with a 4 percent dividend yield.

Disclosure: Interests associated with Fat Prophets declare a holding in Mantra.

Greg Smith is the Head of Research at investment research and funds management house Fat Prophets.  To receive a recent Fat Prophets Report, CLICK HERE

 

 

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