Heavy Investment Commitments And Shrinking Margins Will Pressure Long-Term Returns

Catalysts

About Parque Arauco

Parque Arauco develops, owns and operates shopping centers and mixed use real estate projects across Chile, Peru and Colombia.

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

• Sustained high investment commitments of approximately USD 758 million to expand GLA by only about 8% risk diluting returns if consumer spending or tenant productivity normalize. This could pressure future revenue growth and the cap rate implied by current valuations.
• Heavy concentration in large flagship assets such as Parque Arauco Kennedy and MegaPlaza Independencia increases exposure to execution delays, permitting risks and slower ramp up of new GLA. These factors could depress net operating income and delay EBITDA contribution.
• Structural reliance on tourism and cross border shoppers in Chile, together with traffic sensitive locations like Larcomar and Minka near transport hubs, leaves sales vulnerable to shifts in travel flows and macro conditions. This may potentially weaken same store sales growth and compress net margins.
• Ambitious diversification into multifamily, offices and green financed projects demands new capabilities and ongoing CapEx. If leasing or occupancy underperform, the mixed use strategy could generate lower than expected earnings accretion and weigh on FFO growth.
• Reorganization, centralization of support functions and aggressive cost efficiency programs may yield diminishing marginal gains. At the same time, one off restructuring charges and integration frictions could limit further EBITDA margin expansion from today’s peak levels.

Assumptions

This narrative explores a more pessimistic perspective on Parque Arauco 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 Parque Arauco's revenue will grow by 3.0% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 35.3% today to 30.7% in 3 years time.
• The bearish analysts expect earnings to reach CLP 127.8 billion (and earnings per share of CLP 152.45) by about December 2028, down from CLP 134.2 billion today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as CLP176.3 billion.
• 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 23.3x on those 2028 earnings, up from 20.1x today. This future PE is greater than the current PE for the CL Real Estate industry at 11.0x.
• The bearish 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 14.04%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Tenant sales and rental income are currently growing at double digit rates across most of the portfolio, with total revenues up 24.9% and net profit up 28.2%. If this broad based growth in Chile and Colombia persists beyond the short term, it could sustain higher than expected revenue and earnings levels.
• The company has achieved a record adjusted EBITDA margin of 76.1% driven by zero based budgeting, lean cost programs, technology deployment and economies of scale. Management expects further efficiency gains, which could keep net margins structurally higher and support stronger long term earnings.
• A large, mostly pre leased development and acquisition pipeline, including Kennedy East and West, Minka, Parque La Molina, the new multifamily project and the office tower, is adding high productivity GLA at relatively low incremental operating cost. This could accelerate future revenue growth and EBITDA as these assets mature.
• Portfolio quality and dominance in key locations, such as Kennedy in Santiago, Titan Plaza and Parque Alegra in Colombia and core Peruvian malls, together with rising visitor traffic and tourism, could provide durable pricing power in minimum and variable rents. This could support resilient same store revenue and stable or expanding net margins.
• Balance sheet strength with net financial debt to EBITDA at 5.6 times and access to diversified capital, including the recent green bond, gives the company capacity to continue funding growth projects without excessive dilution or financial distress. This could underpin faster long term earnings expansion than assumed in a bearish scenario.

Valuation

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

• The assumed bearish price target for Parque Arauco is CLP2216.0, which represents up to two standard deviations below the consensus price target of CLP2650.22. This valuation is based on what can be assumed as the expectations of Parque Arauco'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 CLP3300.0, and the most bearish reporting a price target of just CLP2216.0.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2028, revenues will be CLP415.9 billion, earnings will come to CLP127.8 billion, and it would be trading on a PE ratio of 23.3x, assuming you use a discount rate of 14.0%.
  
• Given the current share price of CLP2980.0, the analyst price target of CLP2216.0 is 34.5% 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.