Why I think Mantra Group Ltd shares are a long-term buy

Mantra Group Ltd (ASX:MTR) is a capital light business buffeted by attractive tailwinds.

a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Mantra Group Ltd (ASX: MTR) listed on the ASX in June 2014, after UBS and private-equity firm CVC Asia Pacific sold additional equity in the company for $1.80 per share.

Mantra Group's shares now trade at a whopping 82% premium to the initial offer price, rounding out a solid two years as a listed company and making shareholders that participated in the IPO very happy.

Despite its stellar run, I still rate the hotelier as a buy at its most recent price of $3.28 per share. Here's why.

Resilient business model

Mantra Group operates 127 properties with more than 20,000 rooms under management across Australia, New Zealand, Indonesia, and Hawaii. It is Australia's second-largest accommodation provider (by room numbers) owning the BreakFree, Mantra and Peppers brands, which are targeted at the budget, mid-range and luxury accommodation markets respectively.

The most notable quality about Mantra Group is that its business model is comparable to that of a master franchisors like Mortgage Choice Limited (ASX: MOC) and Retail Food Group Limited (ASX: RFG). Whislt Mortgage Choice and Retail Food Group operate a traditional royalty-based franchise system, Mantra Group differs through its use of complex management agreements with property owners.

Basically, Mantra Group offers investors the opportunity to purchase Mantra Group properties on the promise of a guaranteed rental return. Mantra Group enters into long-term management agreements where property owners (aka the investors) receive a pre-determined rent, whilst Mantra Group pockets the accommodation fees it charges customers.

Although this arrangement exposes Mantra Group to its own risks (such as securing customers), the biggest benefit of its model is that the business is very capital light. With the cost of property upgrades (save for common facilities) being funded by property owners, Mantra Group is able to leverage its hotel network to generate solid cash flows and carry low levels of debt.

Company performance

In its 2016 full-year results, Mantra Group reported 23% underlying earnings growth on the prior year, as organic acquisitions boosted net profit.

Mantra Group's underlying net profit after tax came in at $43.8 million, up 21% on 2015. Basic earnings per share grew 13.8% to sit at 16.2 cents per share, and this placed the group on a reasonable 20.8x trailing price earnings at current prices.

Tourism tailwinds

Although Mantra Group's price-earnings multiple dwarfs that of competitor Crown Resorts Ltd (ASX: CWN), the key difference in my opinion is the strong growth prospects that lie ahead of the former.

Like Sydney Airport Holdings Ltd (ASX: SYD), Flight Centre Travel Group Ltd (ASX: FLT) and other tourism-related stocks, Mantra Group stands to be a big benefactor of the rising trend of inbound tourism to Australia, meaning vacancy rates at its hotels should continue to fall.

If Mantra Group can continue to capitalise on this tailwind and maintain current growth rates for a few years, I believe its shares would be a bargain today in hindsight.

Foolish takeaway

Admittedly, I can't guarantee that Mantra Group shares will rise another 80% from here. The market seemingly sees the strong growth prospects that lie ahead of the hotel operator and therefore demands a higher multiple for the hotel operator.

Even so, the capital light business model and market dominant position makes me think that Mantra Group is capable of meeting these expectations, making it a buy on my list.

Motley Fool contributor Rachit Dudhwala has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

More on ⏸️ Investing

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »

⏸️ Investing

Why Fox (NASDAQ:FOX) might hurt News Corp (ASX:NWS) shareholders

News Corporation (ASX: NWS) might be facing some existential threats from its American cousins over the riots on 6 January

Read more »