Mantra Group Limited (ASX: MTR) is engaged in the provision of accommodation & hotel related services, food and beverage operations and central reservations across Australia, New Zealand, Indonesia and Hawaii. MTR operates three core brands in Peppers, Mantra and BreakFree across three divisions: Resorts, CBD and Central Revenue & Distribution. We believe MTR is well placed to benefit from significant growth in tourism over the coming years.
Business Summary
MTR is the leading Australian-based hotel and resort operator. Mantra Group’s portfolio consists of 128 properties and over 21500 rooms across Australia, New Zealand and Indonesia. Most recently Mantra Group has also acquired operations in Hawaii. Through its portfolio, Mantra Group operates the second largest network of accommodation properties in Australia (by total room number).
MTR Group Locations
Figure 1: MTR Group Locations. (click image to enlarge)
Source: MTR Presentation.

Generally, the operating structures used by MTR provide it with long-term property management contracts across its portfolio and strong contractual rights to operate the properties. Though MTR operates its properties under a range of operating structures, the most predominant structure utilised is that of a ‘Management Letting Right’.
This model offers an efficient solution for strata titled hotels and serviced apartment developments. MTR purchases (1) Exclusive right to operate the hotel/serviced apartment letting business & to conduct the building caretaking, & (2) Associated real estate assets required to operate the letting business (e.g. restaurant, lobby, reception, administration offices). Mantra Group then enters into a commercial arrangement with owners of the room inventory to facilitate the generation and distribution of room revenue and allocation of costs associated with running the hotel letting business.
In terms of profitability, we now observe a sound business whose ROE profile is both solid and improving. Longer term, we believe MTR can achieve normalised ROE of about 17%, reflecting MTR’s ability to drive incremental improvements in profitability as it further leverages its existing accommodation distribution platform. Furthermore, we see strong tailwinds in MTR’s Resorts business, which continues to achieve growth in both its occupancy and average room rate. In aggregate, this is a strong driver of organic profit growth.
Our required return of 11.0% is relatively low compared to other companies covered in StocksInValue. This reflects MTR’s solid balance sheet, sound cash flow profile, track record, industry positioning and generally favourable long term industry dynamics.
MTR NROE FY2013 – FY2019
Figure 2: MTR NROE FY2013 – FY2019. (click image to enlarge)
Source: SIV

MTR delivered a solid first half result whilst reiterating full year guidance of EBITDA between $101m and $107m. With regards to operational momentum, in the near term at least, MTR remains a story of two divisions: The Resorts division is firing on all cylinders while the CBD division appears to be moderating.
One of the positive features of the MTR business is the relatively capital light, cash generative nature of its operations. As illustrated below, MTR has a sound track record of generating a solid and growing level of cash flow from operations. This has been used to reinvest for growth as well as fund a steadily growing stream of fully franked income to shareholders. Consensus expectations for FY17 operating cash flow currently sit at $75m (source: Thomson Reuters).
MTR Financials FY2013 – FY2017
Figure 3: MTR Financials FY2013 – FY2017.  (click image to enlarge)
Source: SIV

Broadly speaking, MTR has many of the core investment attributes that we look for, such as; An easily understood business with bright future prospects, a solid balance sheet that is not excessively geared, strong cash flow, growth in profit and profitability and a high-quality management team with decades of collective experience. However, this doesn’t mean that we rush out and buy a part share in the business irrespective of price. Trading in MTR since its ASX listing has in fact reminded us of one of Warren Buffett’s most famous quotes:
“The stock market is a no-called-strike game. You don’t have to swing at everything — you can wait for your pitch. The problem when you’re a money manager is that your fans keep yelling, ‘Swing, you bum!'”
Those who have swung too early on a business with generally sound characteristics have thus far struck out. We would suggest that many investors caught up in the tourism thematic have overpaid for a sound business. As the ‘price vs value’ chart below illustrates, we believe MTR is now starting to screen as more interesting from a valuation perspective.
Price vs Value
Figure 4: Price vs Value.  (click image to enlarge)
Source: SIV

Should we see further volatility in the months to come, and/or a market wide pullback, an appropriate margin of safety may well open up for those seeking exposure to one of Australia’s better quality tourism-related businesses.
 
Adrian Ezquerro is a senior analyst for the Clime Smaller Companies Fund www.clime.com.au/cscf
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