Investors must keep a sharp eye on industry ‘disruptors’ that wreak havoc on existing business models and destroy share prices. They must also look for instances where the market overestimates the potential of disrupters and creates value in incumbent companies.
True disrupters can destroy the value of existing companies in a blink. Think of online advertising companies, such as Seek and REA Group, and their effect on print media companies in the past decade. Or the pain that Uber is inflicting on the taxi industry.
Not all disrupters are technology based. International retailers, such as Zara, Uniqlo, Top Shop and H&M are increasing their market share in Australia, off a low base. Their rapid store rollouts could badly disrupt established retailers, such as department stores.
Airbnb is another example of an online disruptor reshaping an industry. As consumers flock to private accommodation offerings, some big hotel chains are hurting. A ramp-up of Airbnb’s Australian operations, through its current advertising campaign and aggressive price discounting, has implications for Australian accommodation providers.
Airbnb’s growing threat has weighed on Mantra Group’s share price this year. The accommodation provider was one of the best floats in years, briefly soaring above $5 late last year. Mantra has since fallen to $3.30 as more analysts examine the risk of Airbnb to its earnings.
Chart 1: Mantra Group
Source: The Bull
I highlighted Mantra for The Bull in February 2015 at $3.06, noting: “In the medium term, Mantra should benefit from continued improvement in business and leisure travel. The lower Australian dollar is a big tailwind, although it will take time to be felt fully in the sector and flow through to Mantra’s earnings. Longer-term, a capital-lite business model and sound balance sheet offer scope to continue opening new hotels and upgrade existing ones.”
My core view on Mantra has not changed: its hotels and resorts are superbly leveraged for growth in Asian tourism over the coming decade. Airbnb’s growing presence is a significant risk in the next few years, but not enough to warrant Mantra losing a third of its share price.
For a start, the Asian middle-class tourism market, typically older and likelier to visit through group tours and stay at four-star hotels, will be less attracted to Airbnb’s offering. Business travellers, too, are still a long way from choosing Airbnb over established hotels, in volume.
Most Airbnb properties in Australia are outside the central business district (CBD) area: they are great for travellers who have more time and want to experience the place as a resident. But they are less compelling for older travellers or businesspeople who are on a tight schedule and need to stay in the city. Four and five-star CBD hotels make more sense for them.
Even so, Airbnb will hurt city hotels at the margin, and its discounting and growing presence in Australia should not be taken lightly. Airbnb has a formidable brand, business model and customer value proposition; more business travellers and older tourists, in time, will favour it over pricey hotels. But overlap between Airbnb and Mantra, at least for the next few years, is limited. Well-run accommodation providers can still prosper by growing the overall market, even as their market share contracts slightly because of competition from Airbnb.
The problem with disrupters, of course, is a lack of precedents to go on. Nobody knows how quickly consumers migrate to their new models, or how regulators will respond to online accommodation and travel offerings that are unregulated. Or if consumers tire of new business models and gravitate back to the old.
Mantra’s biggest problem was its valuation: it ran too far, too fast after raising $239 million in its June 2014 Initial Public Offering by issuing $1.80 securities. Although impressive, Mantra had not done enough to justify a near tripling of its share price in less than two years.
I like Mantra’s product, performance, property pipeline and market position – at the right price. And its leverage to inbound Asian tourism, a recurring theme of this column over the past few years, and one of the sharemarket’s best bright spots.
Rampant domestic competition in airfares is another tailwind for Mantra as more people travel interstate for short breaks. As is a likely lower Australian dollar in the next 12 months.
Mantra has good overseas growth prospects: this week it announced the acquisition of the Ala Moana hotel in Hawaii, a market that has similar characteristics to Queensland, with limited supply, good airport access, and favourable weather.
At $3.30, Mantra trades on a forward Price Earnings (PE) multiple of just under 17 times 2016-17 earnings – not excessive for a company with good growth prospects.
Five broking firms have a buy recommendation, four have a sell and one has a hold, according to consensus analyst forecasts. A median share-price target of $4.55 suggests Mantra is significantly undervalued after its share price fall this year.
I would not go that far, but believe price weakness has created a reasonable opportunity in Mantra for long-term investors who believe in the inbound Asian tourism theme, and can tolerate short-term price volatility.
The key is Mantra holding support on its price chart around $3.30, which it appears to be doing this week. A break of that support could drive the price lower in the next few months.
Tony Featherstone is a former managing editor of BRW and Shares magazines. The column does not imply any stock recommendations. Readers should do further research of their own or talk to their financial adviser before acting on themes in this article. All prices and analysis June 22, 2016.