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

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.

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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.

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