Mantra shares slide as Deutsche cuts price target

Deutsche Bank has slashed its target price, warning of risks to the group’s performance.

Deutsche’s primary concern appeared to stem from valuation, which it said was lofty.

Hotels operator Mantra has seen its shares tank as much as 9.4 per cent, as Deutsche Bank analysts slashed their target price on the group.

In a note to clients this morning, Deutsche warned valuations were not compelling given the cyclical nature of an industry currently in an upswing, the threat of impairments and a rising risk profile.

On the latter point Deutsche expressed concern about the sudden resignation of finance chief Steven Becker last month, a move which kickstarted a downtrend in the group’s shares that has yet to be rectified. It was also cautious on a recent purchase of a Hawaiian resort, which was seen adding risk to a growing portfolio.

The news of Mr Becker’s planned departure pushed Mantra shares down 6 per cent in mid-June and despite paring losses today, it is on track for a similarly dire session.

Deutsche’s primary concern appeared to stem from valuation, which it said was lofty due to current strong industry conditions that couldn’t be expected to last too long in a cyclical industry.

The investment bank sees disruption, from the likes of Airbnb, shaking up the sector to a degree that earnings quality comes under question in the medium-term.

The major risk to earnings quality was the likelihood of an accelerated amortisation schedule, which could potentially lead to significant impairments.

In Deutsche’s view, Mantra’s 40-year amortisation schedule for management letting rights in an industry that is increasingly competitive is “not overly conservative” and opens the door to writedowns in coming years if the useful life of assets is seen to be much shorter.

“Our concern is in relation to the level of conservatism and the fact that the ‘market value’ of these MLR’s (management letting rights) over the next 40 years has the potential to diverge significantly from its book value, increasing the likelihood of impairments (i.e. under-amortisation),” the bank’s analysts said.

The note pointed to a downside to earnings per share of 12 per cent if a 20-year amortisation schedule was operational, with the impact on investor sentiment even more significant.

“This only captures the earnings impact not the multiple the market would ascribe to this queried earnings stream,” the note read.

“Given acquisitions have been a key driver of Mantra’s strong EPS momentum and associated premium price-to-earnings multiple, the additional risk is that the market begins pricing a wider disconnect between EPS and value accretion from acquisitions, causing further multiple compression.”

Deutsche opted to shift its rating from ‘hold’ to ‘sell’, cutting its target price by one-third to $3 a share.

At 2.30pm (AEST), Mantra shares traded down 6.1 per cent at $3.25. Ahead of Mr Becker’s resignation announcement in June they traded at $3.81, although the group remains well above its 2014 IPO price of $1.80.