CORR: Mantra Adds More Upside With Outrigger Assets

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

The story below, originally published yesterday, 7 April 2015, has been corrected to remove the incorrect statement that Mantra had acquired the Outrigger brand in Australia. The acquisition includes all assets, including management rights to four properties, while the brand remains with Outrigger Enterprises Group, based in Hawaii. FNArena apologizes for any potential confusion caused.

-Strong growth in key geographies
-Benefits from lower AUD
-Well positioned for consolidation
 

By Eva Brocklehurst

Hotel and resort operator Mantra Group ((MTR)) has added four assets from Outrigger Hotels & Resorts to its portfolio. The Outrigger properties complement the resort suite in terms of location and customer profile, in the playgrounds of Queensland's Gold Coast, Noosa and Airlie Beach. These are leisure market regions which are easily accessible in terms of air and land transport.

The acquisition makes strategic sense to Macquarie, providing additional exposure to quality properties. There are potential synergies from the integration of the new properties into the company's marketing as well as benefits from Mantra's expertise. The broker highlights a recent report on the hotel industry outlook for this year which signals solid revenue per available room (RevPAR) growth of 4.6% out to FY17. The Dransfield report forecasts mining-related markets will continue to struggle and, in an environment of high CBD occupancy rates, slower supply growth does put some constraint on demand. The biggest growth areas in the Australian hotel markets are seen in Cairns, Gold Coast, Melbourne and Sydney.

Macquarie had not factored in such a large portfolio acquisition so soon – acquired for $29.5m – but the combination with modestly higher CBD room rate growth means the broker has ratcheted up forecasts post FY16. Macquarie expects earnings growth of 15% in FY16 and 10% in FY17. Favourable industry fundamentals bode well such that Morgans also remains a "happy holder" of the stock. Taking the acquisition into account, Morgans increases FY16 and FY17 forecasts by 5.5%. The broker expects more acquisitions will be announced over coming months.

Management recently issued an upbeat trading update, stating that its strong performance continued in January and February with trading ahead of expectations. With a strong position in domestic travel, brokers expect the company to benefit from the decline in the Australian dollar.

Deutsche Bank recently initiated coverage on the stock with a Buy rating. The broker's view is based on Mantra's capital-light business – the company does not own the properties outright – which generates strong cash flow and attractive organic returns amidst supportive industry conditions. Despite a positive outlook on the industry, Deutsche Bank has taken a conservative stance towards RevPAR forecast to reflect supply response and demand risk. Nevertheless, the broker observes the company retains the balance sheet capacity and scale efficiencies to drive further profit growth via deployment of its capital in acquisitions.

Credit Suisse, too, considers Mantra well positioned to capitalise on further consolidation in the market and suspects the opportunities are increasing, with a number of similar-sized transactions that might become available. The industry conditions are improving and the lower Australian dollar is benefitting both domestic and inbound travel. Credit Suisse believes Mantra is in an upgrade cycle and should deliver substantially stronger earnings growth over the next three years.

Mantra is Australia's second largest accommodation services provider and operates with three main brands: Peppers, Mantra and Breakfree. The company operates the properties under long-term contracts with the owners, while taking strategic stakes in the associated real estate such as restaurants and conference facilities. Headquarters are in Surfers Paradise, Queensland, and Mantra listed on ASX in June last year. The stock has three Buy ratings and two Hold on the FNArena database. The consensus price target is $3.51, suggesting 4.3% upside to the last share price. Targets range from $3.20 to $3.70.

See also, Brokers Attracted To Mantra's Growth on March 2 2015.
 

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