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Treasure Chest: Buying Opportunity In Mantra Group

Treasure Chest | Jul 21 2016

This story features METAL TIGER PLC. For more info SHARE ANALYSIS: MTR

By Eva Brocklehurst

Weakness in hotel operator Mantra Group ((MTR)) is overplayed and the stock presents a significant buying opportunity according to Bell Potter, who has reviewed the reasons given for the weakness and finds little justification.

Airbnb has been cited as a cause but the disruptor is actually expected to increase travel options as it entices a new type of consumer, who was unlikely to be a hotel client in the first instance. Airbnb, which enables people to rent their home as a vacation option, has garnered appeal in major European cities because of the prohibitive cost of accommodation for leisure travellers.

Citi recently reviewed its take on Airbnb, upgrading Mantra to Neutral from Sell and dousing the argument that Airbnb was a substantial threat in the immediate term. The broker still believes the threat is real but expects the impact will be further into the future. Another substantial positive for Citi is that Mantra ratings have improved on Tripadviser.

In addition, Airbnb is unable to cope with group bookings which are an important component of hotel revenue, Bell Potter contends. Meanwhile, a share price decline in US hotel stocks has corresponded with the fall in Mantra's share price, which suggests to the broker there has been a de-rating of the whole sector over the last 12 months because of the downgrade to the global economic outlook.

The other reasons cited for Mantra's weakness are recent senior management changes, which Bell Potter believes should not be interpreted as a sign that all is not well with the company. There are also negative perceptions regarding the acquisition of Ala Moana Hotel in Hawaii, but the broker regards the hotel as providing upside risk to earnings from strong operational management.

This was a sensible expansion, in the broker's view, and a first step to exploring a range of international opportunities. There is also considerable potential to improve the earnings profile of the Ala Moana property. Morgans is of similar view, noting this is a key tourist destination with high occupancy.

Bell Potter also contends there is no indication domestic opportunities have diminished. Rather, the revenue outlook is favourable for the Australian hotel segment given a lack of new supply amid improving domestic demand. The strength of the inbound holiday market from Asia, and particularly China, adds support to this view.

The broker expects margins have further upside potential, as Mantra builds more direct bookings and its brand outside Australia. One of the limitations of the business is that there is little recognition of the company outside of Australia, the broker asserts, and this is something which can be changed, perhaps via a strategic partnership with a global hotel chain.

Bell Potter, not one of the stockbrokers monitored daily on the FNArena database, retains a Buy rating and $4.68 target. The database has two Buy and five Hold ratings. The consensus target is $4.24, suggesting 23.7% upside to the last share price. Targets range from $3.45 (Citi) to $5.05 (Morgan Stanley).

A softer outlook resulted in Credit Suisse downgrading to Neutral from Outperform earlier this month, having re-assessed forecasts for FY17-18 in the light of industry commentary on revenue trends. The broker acknowledges that upside exists in terms of mergers or acquisitions, estimating Mantra can spend up to $100m and achieve a 10% accretion in FY17.

Still, a more robust organic outlook is required for Credit Suisse to justify a higher multiple and the stock is expected to be range bound near term. Credit Suisse retains a $3.75 target.

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