Mantra Accommodates Strong Upside

This story features STRATA INVESTMENT HOLDINGS PLC. For more info SHARE ANALYSIS: MTR

-Likely benefit from consolidation
-Demand improving at resorts
-Maiden dividend likely in FY15
 

By Eva Brocklehurst

Mantra Group ((MTR)) maintains a positive outlook for corporate travel, citing healthy occupancy levels in all capitals. Brokers found little to fault in the accommodation operator's maiden full year results as a listed company. Domestic leisure demand is still strong, with no impact evident from higher air ticket prices. The resort conference market, which has been challenged over the past 3-4 years, is also improving.

Brokers like the business model. Mantra's earnings are leveraged to the domestic leisure and business travel market but, in the longer term, UBS also expects the company to benefit from industry consolidation as well, as larger operators can better manage pricing and brand value. Are there any problems? Only if one is being picky, Macquarie observes. CBD occupancy did slightly miss forecasts but this was somewhat offset by higher paid rooms sold. The CBD miss was largely from an expected slowdown in Perth's corporate market but this is now stabilising. UBS also observes the Brisbane CBD market remains relatively subdued.

RevPar – the hotel industry's measure of revenue per available room – was slightly below forecasts but the difference is immaterial in the broker's opinion, as Mantra outperformed on non-room revenue which bodes well for volume growth. UBS retains a Buy rating and $2.55 target.

Management has reiterated prospectus forecasts for FY15 sales growth of 8.5% and earnings growth of 11.4%. Mantra is in the enviable position of being offered numerous new opportunities, a different position to where it was 7-8 years ago, Macquarie observes. The broker also notes there is good visibility over the next three months for the business into the summer holiday period. Macquarie rates the stock Outperform with a $2.51 target.

Mantra expects to pay a maiden dividend in the second half of FY15. If the trajectory in RevPar continues, UBS easily envisages upside to FY15 prospectus forecasts, reflecting improving business confidence and a recovery in domestic tourism. UBS expects Sydney, Melbourne and Queensland accommodation markets, where Mantra has most of its operations, should provide robust growth in earnings over the next two years.

The broker liked the positive commentary surrounding key resort markets in the tropics, Sunshine Coast and Gold Coast as well as key CBD markets in Melbourne, Sydney and Darwin. Resort destinations in Cairns, Palm Cove, Gold Coast and Queenstown (NZ) are receiving strong interest from Asian inbound tourists. A number of sporting or cultural events are scheduled for FY15, adding further certainty for demand in key markets. These include the G20 conference, the Cricket World Cup and AFC Asia Cup.

Mantra is the second largest accommodation operator in Australia. It has more than 11,000 rooms in over 110 properties in Australia, New Zealand and Bali. The portfolio ranges from luxury resorts to serviced apartments and there are three core brands: Peppers, Mantra and Break Free. Mantra is shifting the Peppers brand into the CBD via a boutique hotel offering and the first one has opened in Canberra. Peppers in Melbourne is currently under construction.

Eight new properties were added in FY14, two in Brisbane and one each in Melbourne, Wollongong, Bali, Broome, Gold Coast and Whitsundays. Macquarie notes the new property pipeline is strong but management is maintaining a discipline regarding metrics and return hurdles. The broker hopes an early indication on how growth is tracking will come from the AGM later this year and provide a catalyst going forward.

 Australia is well into a extended period of below average hotel room supply increases, brought on the the magnitude of supply growth for the Sydney Olympics. There are also structural obstacles to building new properties. As a result, UBS observes the recent improvement in demand has driven the best revenue performances since 2011.
 

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