Mantra Group in ‘sweet-spot’ of tourism tailwind

Renewed optimism over a tailwind for tourism exposed businesses, due largely to strong inbound numbers from China, and a solid result for the half year to December 31 – with revenue up 21.7% to $307 million – has helped to push the share price in Australia’s second largest hotel and resort operator, Mantra Group (ASX: MTR) up 7% to $3.91 since late-April.

Adding to improving market sentiment for the travel industry was a recent update from Webjet Limited (ASX: WEB) in which the management team squelched concerns over softness in the industry by reaffirming strong demand experienced from both consumers and businesses.

This is good news for Mantra Group which operates over 13,000 rooms across Australia, New Zealand and Bali, with signs of a further weakening of the Australian dollar adding to the attractiveness of Australia as a holiday destination.

What’s also added to renewed market interest in Mantra Group is its recent US$52.5 million acquisition of Hawaii’s ALM Management Services LLC, operator of the Ala Moana Hotel in Honolulu.

Marking the company’s first foray into the US, this acquisition adds a further 1,086 rooms to the company’s arsenal, and is expected to contribute approximately US$7 million in underlying EBITDAI in its first full year.

While Mantra Group has a quality balance sheet, with a funding surplus of $43 million, and decreasing net-debt to equity of 33%, it decided to raise the funds for the acquisition through a share placement which raised $107 million through the issue of approximately 27 million shares to institutional investors at $3.95 each – a 1.5% discount to Mantra Group’s share price at the market close on May 17.

While Mantra is not without its competitors, including Airbnb – which has been speculated as potentially doing as much damage [to Mantra] as Uber did to Cabcharge (ASX: CAB) – the current tourism tailwind should see Mantra exceed market expectations at full year.

Included amongst some impressive numbers at half year were:

Underlying earnings before interest, tax, depreciation, amortisation and impairment (EBITDAI) up 26.1% to $53.2 million (growth was 11% excluding new properties).

Underlying net profit after tax (NPAT) up 26.6% to $27.6 million.

Underlying NPAT but before amortisation of lease rights (NPATA) up 25.3% to $28.9 million.

Underlying earnings per share (EPS) up 18.6% to 10.3 cents per share.

Equally encouraging, during the half year, average room rate increase to $171.14 per night, and occupancy level increased to 79.9%.

Having incorporated the benefits from nine new properties added to the portfolio over the half, Mantra’s expectations for the full year include: EBITDAI between $88.5 million and $90.5 million, NPAT between $41.5 million and $43 million, and NPATA between $44.2 million and $45.7 million

Mantra Group’s EPS growth has been exceptional over the last five years, and is forecast to remain so; with EPS expected to grow from $0.17 in 2016 to $0.22 in 2018. Similarly, there’s been a significant improvement in return on equity (ROE) – which has averaged -1.65% since 2010 – with ROE now in double-digits of around 12%.

The stock is forecast to increase its value by around 11% over the next 12 months, and dividend yield is expected to grow from 2.77% in 2016 to 3.72% by 2018.

Given that future threats from Airbnb and other online booking agencies are speculation at best, Mantra Group is likely to continue enjoying its ‘market darling’ status, courtesy of projected increases in domestic tourism.

Currently trading on a 60% premium to its intrinsic value (IV), the stock clearly isn’t as cheap as it was back in late-April.

However, it’s still trading at around a 30% discount to its share price peak of $5.05 late in 2015, and a 40% discount to a higher end target price of around $5.50.

The stock is well positioned to continue its growth-by-acquisition strategy, and the purchase of the Ala Moana Hotel in Honolulu suggests it’s increasingly willing to expand beyond its home turf to find the right opportunities.

Buy on market dips, and watch closely for any drivers likely to re-rate the stock as the inbound tourism story continues to unfold, on the back of a weakening A$