Australia | Jun 30 2006
By Greg Peel
Oaks Hotels & Resorts (OAK) is the latest in a recent spate of coverage initiations from the team at Merrill Lynch. The company was founded by Brett Pointon in 1991 and has expanded significantly ever since.
Oaks is a management and letting rights (MLR) specialist and one of the largest accommodation operators in Australia. The concept of MLR developed in Queensland in the 1970s when property development and sales of white shoes boomed. Developers sought means to market new serviced apartments to investors.
Thus an industry was born to service holiday-makers and corporate travellers with affordable accommodation without the bells and whistles. While initially the preserve of absentee owners and husband and wife teams, the industry spawned consolidated players such as Oaks which grew into a sizable operation. Oaks currently boasts 2,800 rooms under management and has set its sights on 4,000 by the end of next year, Merrills reports. Rooms are Australia-wide, but there is a concentration in the holiday/conference heartland of Brisvegas and SE Queensland.
Oaks listed in January at $1.00 and closed yesterday at $1.66. The prospectus anticipates a profit of $14m for FY07 but Merrills is happier with a figure of $16.5m given a 16% increase in rooms under management since listing and a slight increase in margin.
Merrills is assuming 170% earnings growth in FY07 driven by the inclusion of more MLRs in the time frame. The analysts see this as achievable given the number of MLRs acquired to date. They are tipping earnings per share of 4.7c in FY06, 12.7c in FY07 and 15.5c in FY08.
The macro themes further support Oaks case, suggests Merrills. Population growth is still exploding in SEQ and a lot of customers are actually locals. The non-local market is expected to be fuelled by cheaper domestic flights and a growing fear of overseas destinations (think Bali).
There is a good deal of consolidation currently underway within the industry. The large number of smaller players is being gradually reduced, falling to the larger players being MFS, Outrigger and Oaks, Merrills reports. These three rule 40% of the current market. With such consolidation underway, the analysts will not rule out the possibility that Oaks may become a takeover target itself.
Merrills has assumed a PE valuation methodology for Oaks, believing the shares should trade at a 16.1x FY07 multiple comparable to domestic peers. This results in a target price of $2.05 – 24% above yesterday’s close.
ABN Amro is the only other broker in the FN Arena database to cover Oaks, having jumped in early in January. ABN initiated with a Buy and a $1.55 target. Earlier in the month ABN bumped the target to $1.75 but pulled the rating into Hold. This was based on the 60% price rise, which is the usual broker reaction. Merrills may have come in late, but clearly the analysts like what they see.