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DBS starts Mandarin Oriental at 'buy' due to bullish recovery prospects

The analysts at DBS have given Mandarin Oriental a TP of US$2.30, representing an upside of 14%.

DBS Group Research analysts Tabitha Foo and Derek Tan have initiated coverage on Mandarin Oriental with a “buy” call and a target price of US$2.30 ($3.21), as they are bullish on the counter’s recovery prospects on the back of the heightened travel demand.

“The immense pent-up demand of travellers is evident after more than two years of disrupted travel plans and pandemic fatigue. We believe that the worst is over for Mandarin Oriental and a robust recovery awaits,” they write in their report dated Aug 29.

On this, the analysts have forecasted Mandarin Oriental’s revenue per average room (RevPAR) in the FY2022 and FY2023 to come in at US$251 and US$297, or at 91% and 107% of the group’s pre-Covid-19 levels.

“We also see a turnaround in profitability and the resumption of dividend payouts by FY2023,” the analysts say.

In addition, even if the demand in travel declines subsequently, Mandarin Oriental should be “relatively insulated” from any decline due to the increased travel cost pressures, the analysts note. This is due to its position in the luxury segment, which caters to consumers who are less price sensitive and are willing to pay more for quality service and amenities.

They write: “We believe that revenue growth can outpace cost pressures going forward on the back of pent-up travel demand coupled with the gradual resumption of corporate travel from 2HFY2022 onwards.”

The analysts’ target price is based on a sum-of-the-parts (SOTP) valuation with a 40% discount on owned hotels and The Excelsior, Hong Kong.

The target price also represents a potential upside of 14% from Mandarin Oriental’s current share price of US$2.02.

“The stock currently trades at an attractive P/NAV of 0.75x, which is [around] 0.5 standard deviation (s.d.) below its five-year historical mean,” Foo and Tan write.

To the analysts, the resumption of travel in Hong Kong, China and Japan will see a “rapid and significant” return of demand, bringing the next leg of growth for the group.

“With Asia’s recovery lagging behind that of other regions, the return to normalcy in Hong Kong, China, and Japan will greatly bolster Asia’s performance,” they write.

In addition, Mandarin Oriental’s strong development pipeline of managed properties will help boost its growth in its bottom-line.

“The group is expected to grow by 25 projects, likely to open in the next five years, comprising 11 standalone hotel projects, 11 projects with hotel and residential components, and three standalone residential projects,” the analysts write. “With no equity investment required and higher margins for management contracts, we expect these managed properties to help boost bottom-line growth upon completion.”

Further to their report, the analysts have estimated a revised net asset value (RNAV) of US$3.40, which includes the analysts’ fair value estimates for Mandarin Oriental’s 15 owned hotels and the book value of The Excelsior, Hong Kong.

“After considering the group’s net debt, we estimate a RNAV of US$4.30 billion and a RNAV per share of US$3.40. We apply a discount of 40%, as the stock is more illiquid compared to its global peers, giving a target valuation of US$2.50 billion and target valuation per share of US$2.04,” they write.

Key risks, in the analysts’ view, include the macroeconomic uncertainties, labour shortage and the group’s challenges in finding new opportunities, which will enable it to grow.

As at 12.44pm, shares in Mandarin Oriental are trading flat at US$2.02.

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