Brokers Attracted To Mantra’s Growth

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

-Cash flow affected by timing
-FX benefits yet to play out
-Recovery in corporate travel too
 

By Eva Brocklehurst

Mantra Group ((MTR)) is supported by a positive outlook for the travel market with a strong pipeline of new properties in the wings. The hotel and resort operator is citing strong inbound and domestic demand and a recovery in the corporate market.

Earnings growth in the first half reflected increased occupancy, rate rises and strong growth in online bookings. The company also declared a maiden interim dividend of 5c per share, fully franked. The policy is to pay out 70-80% of statutory profit in dividends and a dividend reinvestment plan (DRP) will operate for this particular dividend.

Operating cash flow was weaker than Morgans expected, but this was attributed to a timing issue following payment of IPO costs. The balance sheet is roomy enough for further acquisitions and another five new properties will be added in the second half and five in FY16. Morgans is attracted to the quality of the business, the diversified portfolio and cash flow, but current trading levels suggest to the broker a Hold rating is appropriate. Earnings are seasonally skewed to the first half, particularly for the resorts, given peak bookings, occupancy and room rates over the Christmas holidays.

Macquarie had assumed a higher interim dividend would be paid because of this seasonal skew to the first half. Having expected an upgrade to forecasts the broker considers management is being conservative. Commentary was positive, signalling a strong start to the second half. Macquarie also observes management was not willing to attribute the strengthening in domestic travel entirely to an FX benefit, suggesting that these effects are yet to play out. Nevertheless, Mantra did state the currency was having a stronger influence on international inbound travel, as emerging markets are more price sensitive.

Macquarie was concerned about a potential softening in the corporate market as key business indicators are patchy. This concern was put to rest, with the seasonal return of the market in February considered to be quite solid. The broker also notes the group is unconcerned about the increase in the Wotif.com ((WTF)) commission rate to 15% from 12%, believing the overall impact will be net neutral.

The outlook has strengthened further, in Credit Suisse's opinion. Properties are being added at a faster rate and the broker now expects an earnings upgrade cycle and a more supportive operating environment will allow a substantially stronger growth profile over the next three years, at around 15% compound. Both CBD operating metrics and the resorts business are supportive and the falling Australian dollar adds a fillip. Credit Suisse is a buyer into any weakness or liquidity events. The first of these liquidity events, concerning escrowed shares, is in March, affecting 10.8% of shares on issue. The second is in September and affects 32.5% of shares.

The broker was disappointed that management only reiterated FY15 prospectus forecasts rather than upgraded but considers there are a number of features of the current environment that warrant a premium, including a substantial competitive advantage, the ability to self fund growth as well as the general industry outlook.

UBS downgrades to Neutral from Buy on valuation grounds but remains buoyed by the growth in accommodation demand and the new property additions. It is simply that most of the cyclical upside in the 12 months ahead is reflected in the share price. On FNArena's database there are two Buy ratings and two Hold. Target is $3.35, suggesting 3.9% upside to the last share price. Targets range from $3.20 to $3.60.
 

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