Recurring Revenue Projects Will Drive Global Diversification Amid Risks

Key Takeaways

• JHSF's strategic focus on recurring revenue from high-margin sectors is enhancing revenue stability and boosting overall earnings.
  
• Significant investments in new projects and international expansion are driving revenue growth, improving margins, and diversifying income streams.
  
• Execution risks in international expansion and macroeconomic challenges in Brazil could impact earnings and revenue, despite promising strategies and improved debt profiles.

Catalysts

Through its subsidiaries, engages in the real estate development business.

• JHSF's focus on expanding its recurring revenue business, which now accounts for 66% of the company's EBITDA, is expected to enhance revenue stability and growth by capitalizing on high-margin sectors such as malls, hospitality, and gastronomy. This strategy is anticipated to impact future recurring revenue and improve overall earnings.
  
• The company’s significant investments in new projects, such as Usina Sao Paulo, Boa Vista Surf Lodge Hotel, and Sao Paulo Catarina Executive Airport expansion, are likely to drive revenue growth and margin expansion by increasing operational capacity and attracting high-end customers.
  
• International expansion through projects like Fasano Miami, Fasano London, Fasano Sardinia, and Fasano Cascais is expected to diversify revenue streams and increase top-line growth by tapping into global markets.
  
• The successful issuance of R$2.2 billion in the capital markets and effective liability management have improved JHSF’s capital structure, enabling the company to fund further investments in high-margin projects, which should positively influence long-term revenue and earnings growth.
  
• JHSF has reported strong operational performance and growth metrics in its malls and hospitality segments, which are leading to increased profitability. The high occupancy and sales growth in malls suggest potential for rental increases, further enhancing future revenue and net margins.

JHSF Participações Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming JHSF Participações's revenue will grow by 20.2% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 53.1% today to 20.3% in 3 years time.
• Analysts expect earnings to reach R$566.0 million (and earnings per share of R$0.83) by about April 2028, down from R$854.4 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 15.0x on those 2028 earnings, up from 3.7x today. This future PE is greater than the current PE for the BR Real Estate industry at 6.9x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 20.45%, as per the Simply Wall St company report.

JHSF Participações Future Earnings Per Share Growth

Risks

• The company's expansion into international markets such as Fasano Miami and Fasano London carries execution risks, which could impact earnings if these ventures do not perform as expected.
  
• High levels of investment in recurring revenue projects, while promising margin growth, might strain the company's capital resources and could impact net margins if the expected returns do not materialize.
  
• The company's strategy includes recycling capital through the sale of less aligned assets. This could result in smaller revenue streams if the sold assets provided stable income, affecting overall revenue.
  
• The global economic environment, including potential macroeconomic challenges specific to Brazil, could pose risks to consumer spending and affect the company's revenue and profitability projections.
  
• Although careful liability management has recently improved debt profiles, any future increase in interest rates could increase financial costs and strain net earnings.

Valuation

• The analysts have a consensus price target of R$7.2 for JHSF Participações 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$10.0, and the most bearish reporting a price target of just R$4.2.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be R$2.8 billion, earnings will come to R$566.0 million, and it would be trading on a PE ratio of 15.0x, assuming you use a discount rate of 20.4%.
• Given the current share price of R$4.72, the analyst price target of R$7.2 is 34.4% 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.