Brokers’ take: DBS initiates Mandarin Orchard at ‘buy’ with US$2.30 target

DBS Group Research has initiated coverage on Mandarin Oriental : M04 0% with a “buy” call and target price of US$2.30 on the hotel group’s portfolio, which represents a 14 per cent upside from the counter’s last trading price of US$2.02 on Friday (Aug 26).  Mandarin Oriental is a global hotels, resorts and residences operator in the luxury segment. The group currently operates 36 hotels and 7 residences in 24 countries and territories.  DBS’s sum-of-the-parts valuation includes a 40 per cent discount on owned hotels and The Excelsior in Hong Kong, which is currently under redevelopment, as the brokerage believes the stock is more illiquid compared to its global peers.  Its analysts note that the stock trades at a price-to-net asset value multiple of 0.75 times, which is “attractive” at current levels being half a standard deviation point below its 5 year historical mean.  While DBS is cognisant that the hospitality industry was one of the hardest hit sectors by Covid-19, its analysts think the worst is now over for Mandarin Oriental as they anticipate continued heightened enthusiasm for travel due to “immense pent-up demand”.  In their view, Mandarin Oriental particularly stands to benefit from less price-sensitive travellers, as being in the luxury segment relatively insulates the group from dampened demand due to increased travel cost pressures.   Coupled with positive macroeconomic factors of low unemployment rates and high levels of excess savings, willingness to pay is high among the hotel group’s target customers and will give their performance a boost, said analysts of DBS.  They are especially optimistic in the recovery of Mandarin Oriental’s occupancy rates, and expect the rebound to continue from H2 FY2022 onwards with revenue per available room (RevPAR) forecasts in FY2022 and FY2023 at US$251 and US$294, or 91 per cent and 107 per cent of pre-Covid-19 levels, respectively.  DBS also foresees a turnaround in profitability and the resumption of dividend payouts by FY2023.  DBS’s positive coverage on the stock is also supported by Mandarin Oriental’s strong development pipeline of managed properties that can be expected to help boost bottom-line growth upon completion.  “With no equity investment required and higher margins for management contracts, we expect these managed properties to help boost bottom-line growth upon completion,” said the analysts.  As at 4.25 pm, shares of Mandarin Oriental on the Singapore Exchange were trading unchanged at US$2.02 .