Mogi Das Cruzes And ComVem Will Increase Rentals Despite Headwinds

Key Takeaways

• Strategic expansion and increased occupancy in key properties are expected to drive revenue growth and improve rental income.
  
• Asset recycling and strategic disposals are aimed at debt reduction and enhanced capital efficiency, potentially boosting earnings and net margins.
  
• Challenging macroeconomic conditions and high expenses are impacting revenues and earnings, while high net debt and reliance on market conditions pose risks.

Catalysts

HBR Realty Empreendimentos Imobiliários S.A.

• The expansion and increased occupancy rates in key properties like Mogi das Cruzes shopping and ComVem platforms are expected to drive revenue growth. This suggests increased future rental income and overall revenue growth.
  
• The opening of new stores and expansions, such as Patteo Klabin with Decathlon as an anchor store, will likely increase gross leasable area (GLA) and subsequent rental revenues, enhancing net margins through better asset utilization.
  
• Increased occupancy and strategic leasing initiatives, such as the lease deals for Pinheiros and the upcoming asset stabilizations, should contribute to higher recurring revenue and improve operational profitability, thus impacting earnings positively.
  
• The focus on asset recycling and strategic disposals, such as the potential sale of Hilton Garden Inn, could lead to debt reduction and better capital efficiency, enhancing net margins and potentially increasing earnings per share (EPS).
  
• The strategic move towards hotels and mixed-use properties, emphasizing operational assets like W Hotel and gaining early pricing maturity, reflects potential for higher hospitality revenue, which could significantly improve net margins due to diversified income streams.

HBR Realty Empreendimentos Imobiliários Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming HBR Realty Empreendimentos Imobiliários's revenue will grow by 28.3% annually over the next 3 years.
• Analysts are not forecasting that HBR Realty Empreendimentos Imobiliários will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate HBR Realty Empreendimentos Imobiliários's profit margin will increase from 20.9% to the average BR Real Estate industry of 19.5% in 3 years.
• If HBR Realty Empreendimentos Imobiliários's profit margin were to converge on the industry average, you could expect earnings to reach R$70.0 million (and earnings per share of R$0.61) by about May 2028, up from R$35.5 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 38.8x on those 2028 earnings, up from 10.8x today. This future PE is greater than the current PE for the BR Real Estate industry at 7.3x.
• Analysts expect the number of shares outstanding to grow by 3.51% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 26.12%, as per the Simply Wall St company report.

HBR Realty Empreendimentos Imobiliários Future Earnings Per Share Growth

Risks

• The company faces a challenging macroeconomic environment that could impact the demand for commercial real estate, potentially affecting future revenues and net margins.
  
• High expenses associated with the W Hotel are impacting NOI initially, as revenue growth is gradual while expenses are fixed from day one, potentially affecting earnings.
  
• The ongoing need for project approvals and the effects of the master plan changes could delay expansions, affecting potential revenue growth from new developments.
  
• The high level of net debt, though partially linked to real estate financing, poses a risk, especially if interest rates rise further, impacting future earnings.
  
• Asset disinvestment plans depend heavily on market conditions and successful negotiations, introducing uncertainty in revenue realization from asset sales.

Valuation

• The analysts have a consensus price target of R$11.875 for HBR Realty Empreendimentos Imobiliários based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of R$31.0, and the most bearish reporting a price target of just R$2.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be R$358.3 million, earnings will come to R$70.0 million, and it would be trading on a PE ratio of 38.8x, assuming you use a discount rate of 26.1%.
• Given the current share price of R$3.73, the analyst price target of R$11.88 is 68.6% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• 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.