New Housing Projects And Recovery Efforts Will Lead To Future Dividends And Buybacks

Key Takeaways

• New housing projects and Line III loan programs are poised to drive revenue growth and enhance cash flow efficiency.
  
• Positive cash flow forecasts may lead to dividends and buybacks, boosting EPS and shareholder value.
  
• Natural disasters and increasing operational costs threaten revenue and profitability, while rising debt and interest rates could undermine financial stability.

Catalysts

Designs, constructs, markets, and promotes low-income and middle-income residential housing developments in Mexico.

• Consorcio ARA plans to start new housing projects in Puebla, Veracruz, and Nayarit, which could drive future revenue growth as these projects begin to generate sales.
  
• The Line III loan programs are expected to contribute significantly to revenues, with installments received during the construction phase improving cash flow and potentially increasing net margins due to more efficient capital deployment.
  
• The company is recovering from the impact of hurricanes in Acapulco and expects a resurgence in revenues from this region to around 80% of pre-hurricane levels, positively impacting overall revenue and earnings.
  
• With a positive free cash flow forecast, there is a likelihood of a dividend payout and share buybacks, potentially enhancing earnings per share (EPS) and shareholder value.
  
• The expected stabilization of general expenses as a percentage of revenues and recognition of deferred revenue from Line III will provide a boost to operating margins and profit margins in the upcoming quarters.

Consorcio ARA S. A. B. de C. V Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Consorcio ARA S. A. B. de C. V's revenue will grow by 7.3% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 9.7% today to 9.2% in 3 years time.
• Analysts expect earnings to reach MX$810.0 million (and earnings per share of MX$0.66) by about March 2028, up from MX$691.3 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 17.1x on those 2028 earnings, up from 6.0x today. This future PE is greater than the current PE for the MX Consumer Durables industry at 5.8x.
• Analysts expect the number of shares outstanding to decline by 0.28% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 19.57%, as per the Simply Wall St company report.

Consorcio ARA S. A. B. de C. V Future Earnings Per Share Growth

Risks

• Natural disasters such as Hurricane Otis have negatively impacted revenues, particularly in the Acapulco region, and similar events could continue to pose a risk to revenue and sales trends in affected areas.
  
• Operating income and net margins have been negatively affected by increased general expenses and lower interest income, which could continue to pressure profitability if not managed effectively.
  
• The residential segment has seen substantial revenue declines due to completion of certain projects and regional impacts, which could signal difficulties in maintaining growth in higher-margin markets.
  
• Cost-bearing debt has increased, and future interest rate environments could further pressure interest expenses, impacting net earnings and financial stability.
  
• The ongoing need to maintain competitive operations and satisfy growing wage demands could increase operational costs, thus affecting net margins and overall financial performance.

Valuation

• The analysts have a consensus price target of MX$6.717 for Consorcio ARA S. A. B. de C. V 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 MX$12.5, and the most bearish reporting a price target of just MX$3.75.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be MX$8.8 billion, earnings will come to MX$810.0 million, and it would be trading on a PE ratio of 17.1x, assuming you use a discount rate of 19.6%.
• Given the current share price of MX$3.42, the analyst price target of MX$6.72 is 49.1% higher.
• 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.