Mantra Expansion Welcomed

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Hotel chain operator Mantra Group will acquire The Art Series hotels, and brokers largely welcome the acquisition.

-Increases exposure to the Melbourne market, with soft conditions expected to continue
-Acquisitions important drivers of growth, given weak organic performance
-Valuation considered fair, pending evidence of a sustained industry improvement
 

By Eva Brocklehurst

Hotel chain operator Mantra Group ((MTR)) will acquire The Art Series hotels, a chain inspired by Australian contemporary artists with operations in Melbourne, Adelaide and Brisbane.

Morgans considers The Art Series a high-quality portfolio, complementing the company's existing brands and providing first rights to future developments. Moreover, the purchase price of $52.5m appears reasonable, the transaction is accretive and there are synergies with existing systems and infrastructure.

The broker believes the acquisition should underpin earnings growth in the CBD segment over coming years and is a good use of the excess capacity on the balance sheet. Nevertheless, because of softer operating conditions in some CBD markets and the Gold Coast, Morgans lowers forecasts and, with less than 10% upside to the price target, maintains a Hold rating.

The acquisition is expected to support FY18 consensus expectations and reduce concerns on that front. While positive on the acquisition, the broker would still prefer to wait and witness the underlying quality of the FY17 results, scheduled for August 29.

The transaction reflects an attractive acquisition multiple, in Deutsche Bank's opinion, and FY18 and FY19 forecasts are raised by 3% and 7% respectively. The broker points out it does leave the company with a fully geared balance sheet and increased exposure to the Melbourne market, which is expected to encounter soft conditions over the medium term.

Citi suspects an acquisition premium may slowly creep back into the company's price/earnings multiple, given the acquisition of The Art Series, together with the new relationship with the developer, Deague Group, represents the first major acquisition since the first half result.

Still, the broker retains questions about the fit with the company's existing three-brand portfolio. Each of the hotels acquired have a degree of goodwill and the broker expects them to retain existing banners.

While operating boutique hotels is considered a reasonable strategy against Airbnb, they are different to operating mass-market brands, and the company may be required to maintain a separate management team in order to be successful.

Citi is pleased the company is acquiring properties in Australia versus new markets but suspects, while some synergies exist, others may be harder to achieve versus an acquisition of hotel stock more closely related to the existing product.

Citi recently downgraded to Neutral but now returns to a Buy rating, given this unforeseen acquisition delivers FY19 accretion of 5% and the share price has fallen 8% since the beginning of the month. This has now sufficiently priced in the broker's concerns about FY18 expectations being too high.

Credit Suisse believes a re-rating requires an improved organic outlook and maintains a Neutral rating. The acquisition appears broadly consistent with the company's stated strategy but underlines the fact that acquisitions are an important avenue for growth, given weak organic improvements across the rest of the portfolio. The broker considers the current FY18 price/earnings ratio of 15.4x as fair, pending sustained evidence of an improving industry performance.

Moelis believes the acquisition will help drive CBD segment earnings growth in FY18 onwards. The broker notes the company typically acquires assets on a 4-6 multiple of operating earnings (EBITDA) and this transaction has a face value multiple at the top end of this range.

The stock remains attractive in the broker's view, given the exposure to domestic tourism. Catalysts are expected to be an improvement in CBD performance and further accretive acquisitions. Moelis, not one of the eight brokers monitored daily on the FNArena database, has a Buy rating and $3.74 target.

Acquisition Detail

The acquisition comprises seven 4-5-star hotels in Australian capital cities with over 1,000 hotel suites and apartments, predominantly Melbourne, complemented by a number of conference and event facilities. The acquisition includes freehold title to key commercial lots with arrangements in place to deliver new Art Series properties in the future providing an additional growth avenue in Australia.

The company forecasts $7m in underlying operating earnings in the first 12 months of ownership. This includes the impact of The Chen at Box Hill, which opens in November 2017 and will be loss-making in the first year. Upon the portfolio stabilising, it is expected to contribute around $8.5-9.0m per annum. The transaction is funded by existing cash and debt.

There are four Buy ratings and four Hold on the database. The consensus target is $3.28, suggesting 12.3% upside to the last share price. Targets range from $3.05 (Credit Suisse) to $3.78 (Macquarie, yet to comment on the acquisition).
 

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