Where is Mandarin Oriental International Limited Heading to Next?

Mandarin Oriental International Limited (SGX:M04) has been a market beater over the last five plus years. The company has recorded total returns of 137% from 1 Jan 2009 to the closing price last Friday.

In comparison, the capital gain returns of the SPDR STI ETF (SGX:ES3), a proxy for the Straits Times Index (SGX:^STI), was around 77% for the same duration.

Over the past five financial years, the hotelier paid out a total of US$0.32 in dividends. My fellow Fool Alison Hunt has more notes about the company here. Its main shareholder, Jardine Strategic Holdings Limited (SGX:J37), holds 73.5% of its ordinary shares, and the associated voting rights.

While the returns from Mandarin Oriental have been comforting — as Foolish investors, we should look behind the curtains to understand what the business drivers are for this move in the share price.

A closer look

Mandarin oriental graph 1










Source: Company Annual Report

Mandarin Oriental operates 26 hotels around the world as of the end of financial year 2013 (the calendar year lines up with the financial year). The hotelier has two segments of businesses; namely the hotel ownership and hotel management.

Let’s zoom into the geographical contribution of sales.

The revenue from the different geographical segments are fairly well spread out. Sales from the Other Asia, though, topped the charts at around 33% of total company sales for 2013. It is interesting that the most of the growth comes from Europe. That segment has grown by 105.2% over the last five financial years. That said, all three segments recorded healthy sales growth exceeding 50% over the same duration.

We would ideally like to see the revenue dollars drip down to the bottom line. For that, we look into the profitability of the business segments.

Mandarin oriental graph 2










Source: Company Annual Report

The earnings before interest, tax, depreciation and amortization or EBITDA is the preferred method of profit measurement for the company. The Hong Kong segment towers above the rest for the contribution of EBITDA. It made up close to half of the company’s EBITDA for 2013. Europe has seen a resurgence in 2013 as well, making up 31.7% of total profits. Elsewhere the Other Asia segment saw the largest increase in EBITDA, increasing 713% over the past five financial years.

Finally, to see where the accumulated profits end up, we look to the balance sheet, specifically, the cash and debt development.

Mandarin oriental graph 3










Source: Company Annual Report

For 2013, the level of borrowings increased by more than US$200 million primarily due to an acquisition of freehold land in Paris, France. The acquisition of the interest cost US$382 million. Mandarin Oriental remained in a net debt for the past five financial years. As with a debt scenario, we have to be mindful of the potential for higher interest rates in the future. As such, it may be important to note that 41% of the borrowings in 2013 are capped, or on fixed interest rates.

A quick peek ahead

As of the end of 2013, Mandarin Oriental manages 26 hotels with 8,000 rooms in total. It also has 18 hotels under development. When put together, the hotelier expects to have close to 11,000 rooms in 25 countries. Of the 18 hotels under development, three are expected to be in America, three in Europe, six in Asia, and another six in places such as Abu Dhabi, and Bodrum. China will be one of the areas of focus for Mandarin Oriental with four hotels being planned there.

Within the next 18 months from the end of 2013, the company expects five new hotels to open in Taipei (Taiwan), Bodrum (Turkey), Marrakech (Morocco), Beijing (China), and Milan (Italy).

Foolish take away

As lifelong students of Foolish long term investing, it pays to look under the hood to understand whether a rise in the company’s share price is supported by the quality of growth that we are looking for.

It is important to keep in mind that the revenue, and profits of the hotelier is also subject to the health of the tourism industry. For the last recession in 2009, sales of Mandarin Oriental fell by 17.5% while EDITBA fell by 46.6%. Individual investors might have to put in balance these considerations in choosing the right price to pay for this company.

As of last Friday’s close of US$1.76, Mandarin Oriental traded at a price-to-earnings ratio of 20.7 and has a dividend yield of around 4%. For more company news and financial information, sign up now for a FREE subscription to The Motley Fool’s weekly investing newsletter, Take Stock Singapore. Written by David Kuo, Take Stock Singapore tells you exactly what’s happening in today’s markets, and shows how you can grow your wealth in the years ahead.

Like us on Facebook  to follow our latest hot articles. 

The Motley Fool's purpose is to help the world invest, better.

The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong doesn’t own shares in any companies mentioned.