Resort group's earnings up but can it hold off Airbnb?
Key statistics: ASX: MTR
Closing share price 22.03.17: $2.660 52-week high: $4.610 52-week low: $2.580 Most recent dividend: 5c Annual dividend yield: 3.96% Franking: 100%
A tale of two contrasting segments
As evidenced by Mantra Group's share price performance in the weeks leading up to and post the 1H17 results release, shareholders were disappointed with what the company delivered. This of course is nothing new, with the stock having consistently underperformed the broader market since late 2015. There are two possible reasons for this, with growing concerns about Airbnb as a potential market disruptor having forced investors to reconsider Mantra Group's premium PER rating.
While there is no denying that Airbnb poses a risk to Mantra Group, we think the magnitude of the threat is overstated. Following in the footsteps of the likes of eBay, and Uber, Airbnb is seeking to have a similar disruptive impact on accommodation markets globally, with the recent fiasco at Trump Tower highlighting the growing awareness and popularity that the online accommodation intermediary is now getting.
However, it remains to be seen how many business travellers and holiday makers will opt for Airbnb over the likes of more traditional providers such as Mantra Group. There are a number of obstacles that Airbnb is likely to face. First and foremost is the fact that, like Uber, Airbnb is testing the limits of Australia's existing legal and regulatory framework. With the government having moved to address these concerns as they relate to Uber, it seems reasonable to assume Airbnb will be next.
Key considerations include council zoning laws, whether Airbnb constitutes a lease or license, tax avoidance issues and other regulatory issues pertaining to food, health and safety, fire or disability access, and public liability insurance.
A quick peruse of press coverage on Airbnb yields no shortage of disaster stories where either home owner has been left with a fine or the renter has been left disappointed.
Fast forward 12 months or so and Mantra Group's shares have well and truly been rerated lower despite the company having consistently delivered on management's earnings guidance. This was certainly evident in Mantra Group's 1H17 results, with management having reaffirmed "the market guidance given in August 2016 for FY17". That is, management expects Mantra Group to report EBITDAI of $101-107 million and payout ratio equating to 60-80 percent of statutory net profit.
At the Group level, it remains clear to us that, excluding acquisition-related costs of $1.7 million during the period, Mantra Group is continuing to perform well, with all of the company's key operating metrics having contributed to the 10-plus percent growth in 1H17 earnings. In essence, Mantra Group was able to report higher average revenue per available room from a larger portfolio of rooms.
However, as has been the case for some time now, Mantra Group's performance continues to be driven by strong growth in Resorts and acquisitions, with the company's CBD business still reporting sluggish operating conditions. Unfortunately for shareholders, the evident weakness in the CBD segment did result in some compression (i.e. circa 80 basis points to 16.5 percent) in Mantra Group's underlying EBITDAI margin in the graphic above.
While both of Mantra Group's reporting segments reported growth in total rooms available (Resorts +16.4 percent on the back of the acquisition in Hawaii and CBD +4.1 percent), the key drag on the company's overall EBITDAI margin was the 2.1 percent decline in the CBD's average room rate, which translated to a 1.6 percent decline in average revenue per available room. In essence, while tourism markets continue to boom, business travel in mining-related areas remains subdued.
Although this has been a familiar tune over the last few years, it will be interesting to see whether the current trend continues, particularly given the recent improvement in commodity prices, albeit at the expense of a higher Australian dollar.
The good news from our perspective is that Mantra Group's earnings guidance for FY17 remains intact, as does the company's strong capital generation and balance sheet, the combination of which will underpin further growth in rooms and dividends.
As evidenced by Mantra Group's 1H17 results and management's guidance for FY17, the company currently has some solid operating momentum. While it is worth noting that a significant amount of this year-on-year growth can be attributed to recent acquisitions, organic growth has also played a role. Furthermore, with Mantra Group's balance sheet remaining in reasonable shape and the Australian dollar trending in the right direction, the company's near-term outlook is positive.
Looking beyond FY17, we make three observations. First, there is limited evidence to suggest that the accommodation market is moving into oversupply.
Second, while Mantra's operating cash flows have been relatively weak of late, financial leverage is still comfortable at less than 1.0 times (1.4 times in 1H16) annualised EBITDA.
Last, Mantra Group has a number of properties scheduled to enter the portfolio in FY18 and FY19 that will add to the company's medium-term growth.
Having listed on the Australian Stock Exchange at $1.80 per share or 12.7 times pro-forma FY15 with an implied yield of 5.5 percent, Mantra Group is now trading at $2.68 per share, which equates to 15.2 times the FY17 earnings forecast and a yield of 4.1 percent.
While this still represents a premium to its IPO metrics, it is worth noting that the stock was trading 25.5 times earnings with a yield of 2.5 percent around its peak in late 2015.
From a technical perspective, momentum remains to the downside, with near term support situated at the January low of $2.66, with an additional line of defence located at the 78.6% Fibonacci retracement of $2.45.
In order for a short-term bull rotation to unfold, it is important that a basing formation unfolds above the $2.45/50 region over the months ahead is followed by a decisive break above the 50-day moving average of $2.90.
Contrary to Mantra Group's share price performance over the last year or so, the company's earnings have continued to trend in the right direction, with the 1H17 results largely in line with expectations.
While Mantra Group's Resorts segment continues to do all of the heavy lifting, we expect recent price improvements across the commodity spectrum to put a floor under the CBD segment's EBITDAI contribution, with new properties adding to medium-term momentum.
Disclosure: Mantra Group is held within the Fat Prophets Small/Mid-Cap Model Portfolio.