Some Thoughts on Minor International by BeforeLosingmysanity

Minor (MINT:TB) is a Thai listed hotel and food business operator with an excellent track record. I’ve been keeping track of the stock for the last few years mostly as a spectator, for which I’ve been kicking myself but that’s beside the point. The company was formed in the late 1970s by an American businessman (now Thai citizen) Bill Heinecke, who took a $1,200 loan and over time turned it into MINT. As a fun fact, the company is called Minor as Mr Heinecke (who owns 33%, c. $1.5bn value) was still a minor when he founded it. While he is relatively unknown outside of Thailand/SE Asia his story is pretty remarkable. After the write up there are a few links to profiles, interviews and he also has a good book about entrepreneurship that I recommend reading.

History

MINT consists of three businesses: hotel (51% of revenue), food (41% of revenue) and retail (8%) and prior to two corporate restructurings operated with three separately listed entities, coupled with cross-holdings in true Asian conglomerate style (see structure below):

  • Royal Garden Resorts (Minor International since 2005) was founded in 1978 with one hotel on the Pattaya beachfront (now Pattaya Mariott Resort & Spa) and listed in 1988
  • Minor Food Group (MFG) was founded in 1980, with one Pizza Hut. This business grew to introduce other Western franchise concepts in Thailand (Swensen, Sizzler, BK, Dairy Queen and so on). Ultimately, Minor lost the Pizza Hut franchise and in “retaliation” formed the Pizza Company (now it’s a larger franchise in the country than Pizza Hut)
  • Minor Corp, which houses the retail business (stores of Espirit, Gap, Tumi etc) in Thailand, was listed in 1991

The first of the consolidations was in 2005 when MINT closed the acquisition process of MFG it started in 2001 (MFG’s results have been consolidated since 2004), which lead to the re-branding of RGR to MINT in 2005. Then in the middle of the financial crisis MINT announced that it planned to acquire Minor Corp and unwind the cross-holdings in an all-share deal. Following these restructurings, MINT now houses all three businesses and Mr Heinecke, who is the chairman and CEO, and his group owns 33% of the company. Below is a summary of MINT’s major moves over its history to date.

Source: Company filings

MINT has been a clear beneficiary of smart capital allocation as well as the growth in SE Asia. Since 2005 to date the share price compounded c. 24% (TSR in THB); revenue and EBITDA grew 16% p.a. and 14% p.a., respectively; while ROIC averaged 18%. Current market cap is $4.6bn (EV $5.8bn) and trades on forward EBITDA of 18x and PE of 26x, respectively so it is hard to call the stock cheap statistically.

Source: Bloomberg. Share price and TSR (THB)

Businesses

What’s key for MINT are the brands it built around the hotel, food and retail businesses over the last 20+ years. Essentially these avenues allow mgmt. to reinvest capital at very high rates, with the added benefit that some of these brands “travel”. Oftentimes you find a brand, such as Tingyi’s Master Kong in China, which is the dominant one in the country but doesn’t travel well outside of the country thus the company is restricted to its home market. Now you could argue that when you rule the noodle empire in China, why would you want to go elsewhere. If the company in question is based in a smaller market or country which is saturated, expansion and brands that travel i.e. having some form of a platform, becomes very important. MINT has historically partnered with leading global brands (see Pizza Hut, Four Seasons etc) but has never been shy to apply lessons learnt from these partnerships to develop their own businesses over time (e.g. Pizza Co or Anantara). The other interesting part is that generally speaking MINT’s existing and new investments are in countries along the new Maritime Road (from China’s OBOR), which is taking everything at face value is not a terrible thing.

Hotel Business

The hotel business (previously RGR) started with one hotel in Thailand. As of 2015 it has 138 properties and over 17,000 rooms (inc. majority owned, JVs and management letting rights and managed) globally. Over the last few years this business contributed 50% to revenues and 60% to EBITDA on average.

Source: Company filings

MINT follows an “asset-right” strategy, which is a combination of direct hotel ownership as well as management contracts. Generally speaking, when the company enters a new market it starts out with management contracts to establish itself. Once it feels more comfortable, it would form a JV with a local partner and then finally own the assets outright. This is the strategy the company followed when the balance sheet was fairly levered before or when it recently entered Africa.

Source: Company filings

Of the existing 138 properties, 30 are purely managed, 49 are under management letting rights (Oaks business, serviced suites in Australia and New Zealand), 30 are in different JVs while 29 are majority owned.

The majority owned hotels contribute 45% to revenues, with nearly 5,400 rooms globally with brands such as Anantara (developed by MINT), Four Seasons, Marriott or St Regis. The most recent addition to the portfolio was Tivoli (hotel operator in Portugal and Brazil with 4-5 star properties). MINT acquired the business to use it as a platform to expand in Europe, LatAm and certain parts of Africa. The acquisition price was €290m or $330m for 2,982 rooms ($110k/key on average) or 9.6x EBITDA (MINT notes normalised 2015 EBITDA of €30m), which is neither expensive nor cheap. Local contacts confirm that the hotels are very good but nothing out of the ordinary.

The Oaks business (management letting rights) contributes 25% to revenues and is a business MINT acquired in 2011 in a bid to increase the company’s asset-light earnings stream. Oaks was under financial stress at the time due to leverage so the purchase was rather opportunistic. The all-in price was around $95m with 2011 EBITDA guidance of $35-40m. Since 2012 (first full year of consolidation) revenues increased c. 50% through 2015. The business now includes over 6,200 rooms in Australia, New Zealand and UAE.

Real estate business (Anantara Vacation Club and residential sales) add c. 20% to revenues and include the development of properties either for sale (the residential part) or a timeshare/lifestyle club (AVC). Currently, AVC has 6,900 members (majority from China) and 137 units in inventory.

Hotel management and JVs contribute around 5% to revenues each on average and include around 30 hotels (over 3,900 rooms) and 30 hotels (over 1,200 rooms), respectively.

The below slide gives an overview of the expansion plans, additionally the company plans to invest to increase it’s residential as well as AVC inventory.

Source: Company filings

Food Business

As noted above the food business has been consolidated since 2005 and it contributes c. 40% to revenues and 30% to EBITDA on average. It is a more stable business and

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