Planned 2 Million Sqm Expansion Could Increase Capacity Despite Interest Rate Risks

Key Takeaways

• Strong leasing performance and consistent lease spreads should drive stable, growing revenues and demonstrate sustained demand for LOG's offerings.
  
• Effective debt reduction and strong pricing power position LOG for sustainable growth and profitability, with low financial risk and improved net margins.
  
• Interest rate dependencies and regulatory changes challenge LOG's revenue goals, potentially impacting asset recycling, margins, and cash flow management.

Catalysts

LOG Commercial Properties e Participações S.A.

• LOG Commercial Properties has launched a new growth plan called LOG 2 million, which aims to deliver 2 million square meters of GLA between 2025 and 2028. This indicates significant expansion in production capacity, likely impacting revenue growth positively.
  
• Despite challenging conditions, LOG has managed to continually increase its average ticket price, up by 11% over the past year and well above inflation. This trend of strong pricing power is expected to positively affect net margins as they are able to pass on costs to customers.
  
• The company showcased robust leasing performance, with 90% of newly delivered GLA pre-leased and consistent positive lease spreads over 10 consecutive quarters. This sustained demand and lease spread should contribute to stable and growing revenues.
  
• LOG has achieved a significant reduction in adjusted net debt and leverage ratios, positioning itself for sustainable growth while keeping financial risks low. This prioritization of financial health through debt management is expected to support stable net earnings.
  
• The company is maintaining high yields on cost with new pre-leased projects, suggesting that future developments will continue to be profitable, thereby enhancing earnings growth.

LOG Commercial Properties e Participações Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming LOG Commercial Properties e Participações's revenue will grow by 18.5% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 151.5% today to 48.4% in 3 years time.
• Analysts expect earnings to reach R$182.5 million (and earnings per share of R$1.2) by about February 2028, down from R$343.4 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 19.1x on those 2028 earnings, up from 4.8x today. This future PE is greater than the current PE for the BR Real Estate industry at 6.5x.
• Analysts expect the number of shares outstanding to decline by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 24.74%, as per the Simply Wall St company report.

LOG Commercial Properties e Participações Future Earnings Per Share Growth

Risks

• Changes in regulatory aspects might impede real estate funds' ability to raise funds, which could present challenges to funding asset recycling, potentially impacting LOG's revenue generation.
  
• The company's sales and asset recycling plans seem to hinge on expectations for interest rates to decrease in the future. Delays or deviations in this trend could affect net margins and profitability.
  
• Achieving targeted sales volumes with current interest rates may require LOG to accept lower payment terms, such as taking shares of real estate funds, which could impair cash flow and earnings.
  
• Construction cost pressures remain despite current manageable levels, and failure to manage potential cost increases could pressure LOG's future earnings and margins, especially for large projects.
  
• The tight spread between the 13% yield on cost and higher interest rates around 15% could limit the company's ability to generate value, potentially affecting future net income.

Valuation

• The analysts have a consensus price target of R$25.7 for LOG Commercial Properties e 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$35.0, and the most bearish reporting a price target of just R$19.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be R$377.0 million, earnings will come to R$182.5 million, and it would be trading on a PE ratio of 19.1x, assuming you use a discount rate of 24.7%.
  
• Given the current share price of R$18.86, the analyst price target of R$25.7 is 26.6% 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.