One way to invest in Australia's next tourism boom

Key statistics: ASX: MTR

Closing share price 07.08.17: $2.950 52-week high: $3.670 52-week low: $2.580 Most recent dividend: 5c Annual dividend yield: 3.61% Franking: 100%

Australia is potentially on the cusp of a tourism boom to rival that of the influx of Japanese visitors in the early 1980s.

International inbound aviation capacity rose 9% in the year to March 2017, hitting 25 million.

The growth is mostly coming from Asia, especially China, with a record 1.2 million Chinese visitors in 2016. As the Asian middle class expands, its spending on discretionary items such as travel is also expanding.

To cater for this surge in visitors Australia needs tourism infrastructure, which includes addressing the shortage of quality hotels.

One company that is in a prime position to do this is Mantra Group. Mantra is the second largest hotel operator in Australia, based on number of rooms, and is listed on the ASX with a market capitalisation of around $900 million.

Mantra has been growing strongly.

When CEO Bob East joined in 2006 there were 41 hotel properties; now there are 128. Revenue has also been growing strongly at 9%pa over the past five years. A significant amount of this growth has come via the acquisition of new properties but in recent times occupancy and average room rates have also been increasing.

This growth looks set to continue. In addition to Australia, Mantra now has properties in Bali, Hawaii and New Zealand. It has opened a new hotel at Sydney Airport and is building one on Melbourne's Southbank.

It has just announced the acquisition of Art Series Hotel Group, which will add seven unique luxury hotels in CBD locations to the portfolio.

Twenty-four per cent of Mantra's room portfolio is on the Gold Coast, making it the largest accommodation provider there.

This is likely to give it an additional boost next year when the Commonwealth Games are held in April.

Despite the tailwinds of strong demand, the accommodation business can be tough as it is highly competitive.

The biggest operator is Accor, with 26,000 rooms in Australia, compared with Mantra's 18,000, but the market is highly fragmented with a myriad of operators. Online platforms make it easy for consumers to compare many options for their chosen location.

In addition to hotel operators, Mantra is also competing with the likes of Airbnb and Stayz, which facilitate private properties providing accommodation.

In the short term there may also be a negative impact on inbound tourism from the recent appreciation of the Australian dollar.

A higher $A makes Australia a more expensive destination compared with some of the alternatives. According to a survey by the Financial Times, Australia was the 12th most visited destination by Chinese tourists in the past 12 months. Other Asian and European countries, as well as the US, ranked higher.

The market is predicting that earnings per share for the 2016-17 financial year have grown by about 12%. All will be revealed when Mantra releases its full- year results, which are expected on August 29.

Based on this, the stock is trading on a PE ratio of about 17, which is neither cheap or overly expensive. The share price hit a high of $5.26 at the end of 2015 and then fell by half to $2.58 in March this year. It has since rebounded 13%, buoyed by the expectations of a tourism boom.

Clearly the market had gotten ahead of itself in 2015 but the stock now appears to be fairly priced given the strength of the business and the potential upside, notwithstanding all the headwinds.

Data accurate as at: 8 August 2017

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