E-Commerce Shift And High Rates Will Pressure Mall Rents And Margins Ahead

Catalysts

About Allos

Allos operates and develops shopping malls and related real estate, with growing exposure to media and advertising assets across its portfolio and airports.

What are the underlying business or industry changes driving this perspective?

• The shift of Brazilian retail spending toward e-commerce and omnichannel models risks structurally slower mall traffic and tenant sales, limiting future rent reversion and constraining top line revenue growth.
• A prolonged environment of high real interest rates in Brazil could cap consumer credit availability and discretionary spending, eroding tenants’ profitability and pressuring occupancy rates, which would weaken rental revenue and net operating income.
• The rapid ramp up of the media and airport business increases execution and client concentration risks. If advertiser demand normalizes after the current high growth phase, incremental revenues may fall short of expectations and compress EBITDA growth.
• Reliance on aggressive efficiency programs and cost cuts after a large integration means further productivity gains will be harder to extract. As a result, margin expansion may stall and future net margins could fall back toward industry averages.
• The planned releveraging, combined with materially higher and front loaded dividend payouts, reduces balance sheet flexibility just as macro and political uncertainties remain elevated. This increases vulnerability to adverse scenarios that could depress earnings and funds from operations.

Assumptions

This narrative explores a more pessimistic perspective on Allos compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming Allos's revenue will remain fairly flat over the next 3 years.
• The bearish analysts assume that profit margins will increase from 25.9% today to 35.2% in 3 years time.
• The bearish analysts expect earnings to reach R$1.1 billion (and earnings per share of R$2.03) by about December 2028, up from R$750.5 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 21.1x on those 2028 earnings, up from 19.5x today. This future PE is greater than the current PE for the BR Real Estate industry at 7.6x.
• The bearish analysts expect the number of shares outstanding to decline by 1.48% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 23.03%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• If post merger integration is not successful, with delays in unifying ERPs, weaknesses in the back office or disruptions to tenant relationships or mall operations, the platform may prove less efficient and could struggle to support sustained revenue growth and stable net margins over the long term.
• If Allos does not continue to gain market share in key regions, or if sales in its malls grow in line with or below Brazilian retail and sector benchmarks, while occupancy softens and prime brands like H&M and Sephora slow or reverse their expansion in its assets, this may undermine long term rental revenue growth and pressure earnings.
• If the Media and airport advertising segment fails to scale, with revenue growth slowing and new verticals in airports and residential developments not materializing as expected, this business may not become a high margin, asset light growth driver, which could limit improvements in consolidated EBITDA margins and reduce earnings diversification.
• If capital allocation is not disciplined, for example if average funding costs rise significantly above CDI, net debt to EBITDA moves well above 1.7 times without a clear plan, or releveraging toward 2 times is combined with higher CapEx and slower paying projects, balance sheet flexibility could be reduced and FFO and dividend funded earnings growth could come under pressure.
• If the multi year efficiency program fails to deliver further SG&A reductions in real terms or if operating costs rise again, while NOI and EBITDA margins stagnate or contract, the expected structural productivity gains may not materialize, making it harder to offset macro headwinds and limiting any expansion in net margins and long term earnings.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for Allos is R$25.0, which represents up to two standard deviations below the consensus price target of R$31.42. This valuation is based on what can be assumed as the expectations of Allos's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of R$37.0, and the most bearish reporting a price target of just R$25.0.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2028, revenues will be R$3.0 billion, earnings will come to R$1.1 billion, and it would be trading on a PE ratio of 21.1x, assuming you use a discount rate of 23.0%.
  
• Given the current share price of R$29.39, the analyst price target of R$25.0 is 17.6% lower. Despite analysts expecting the underlying business to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.