Mexico's Near-Shoring Incentives Will Expand Supply Chains, But Project Delays May Hinder Revenues

Key Takeaways

• Vesta's near-shoring strategy and focus on supply chain strengthening position it for potential revenue growth and increased leasing opportunities.
  
• Dollar-denominated contracts and strategic land investments enhance stability and earnings, aligning with their growth and shareholder return strategies.
  
• Geopolitical risks, competition, and auto industry shifts could hinder Vesta's revenue growth and profitability amid rising costs in key Mexican markets.

Catalysts

Acquires, develops, manages, operates, and leases industrial buildings and distribution facilities in Mexico.

• Vesta's Route 2030 strategic plan anticipates growth through near-shoring and strengthening regional supply chains, with a focus on investment in energy access and ambitious Net Zero and ESG goals, potentially impacting future revenue growth positively.
  
• President Sheinbaum's $1.4 billion near-shoring incentive package for Mexico could attract manufacturing operations from companies seeking proximity to the U.S. market, which may lead to higher revenue and increased leasing opportunities for Vesta's industrial assets.
  
• Vesta's strong focus on dollar-denominated contracts (89% of 2024 revenues) provides a competitive advantage, stabilizing factor, and may lead to higher net margins through reduced currency risk and volatility in financial results.
  
• Continued strategic investments in land acquisition and development in desirable markets such as Guadalajara and Ciudad Juarez focus on capturing leasing opportunities, which could result in increased earnings and revenue expansion as these areas become more integrated into Vesta's growth strategy.
  
• The implementation of Vesta's share repurchase program and its strong focus on disciplined capital allocation supports shareholder returns and could lead to increased earnings per share (EPS) over time.

Corporación Inmobiliaria Vesta. de Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Corporación Inmobiliaria Vesta. de's revenue will grow by 10.9% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 88.5% today to 44.7% in 3 years time.
• Analysts expect earnings to reach $153.9 million (and earnings per share of $0.18) by about March 2028, down from $223.3 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $170.8 million in earnings, and the most bearish expecting $137.0 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 26.0x on those 2028 earnings, up from 8.6x today. This future PE is greater than the current PE for the MX Real Estate industry at 7.8x.
• Analysts expect the number of shares outstanding to decline by 3.95% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 17.69%, as per the Simply Wall St company report.

Corporación Inmobiliaria Vesta. de Future Earnings Per Share Growth

Risks

• Potential delays in project completions, like those observed in Monterrey and Mexico City, could impact Vesta's ability to generate expected revenues and returns on schedule.
  
• Weaker demand and increased competition in northern Mexican markets such as Tijuana and Ciudad Juarez could strain occupancy rates and hinder revenue growth.
  
• Shifts in the global auto industry, such as automakers considering relocating production away from Mexico due to trade issues, could negatively affect Vesta's clients and, consequently, its revenue sources.
  
• Elevated real estate taxes, insurance costs, and maintenance expenses have led to a contraction in the net operating income margin, potentially impacting overall profitability.
  
• Geopolitical risks and uncertainties surrounding tariffs and trade relations between the U.S. and Mexico could disrupt Vesta's strategic plans and financial performance, particularly if these lead to reduced foreign investment or demand in key sectors.

Valuation

• The analysts have a consensus price target of MX$66.591 for Corporación Inmobiliaria Vesta. de 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$73.0, and the most bearish reporting a price target of just MX$57.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $344.0 million, earnings will come to $153.9 million, and it would be trading on a PE ratio of 26.0x, assuming you use a discount rate of 17.7%.
• Given the current share price of MX$45.98, the analyst price target of MX$66.59 is 31.0% 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.