Cuautitlán I And Oaxaca Projects Will Expand Operations But Face Uncertainties

Key Takeaways

• Expanding industrial and retail developments are expected to drive significant revenue and earnings growth through new project contributions and market demand.
  
• Effective cost control, financial stability, and favorable tenant agreements contribute to improved margins and sustained revenue growth.
  
• Reliance on a single vehicle for expansion, lease expirations, and financing methods raises concerns on revenue stability, cash flow, and financial flexibility.

Catalysts

We are a Mexican trust constituted, primarily, to develop, own, lease, operate, and acquire iconic and premier-quality commercial real estate assets in Mexico.

• Fibra Danhos is anticipating growth through its industrial developments, including ongoing projects like Cuautitlán I and potential new opportunities. This expansion is expected to drive future revenue as these properties begin contributing to earnings.
  
• The company is working on a new retail development project in Oaxaca, which could significantly enhance revenue and net income due to the project's large scale and expected market absorption.
  
• Continued focus on cost control and operational efficiency is expected to improve net margins by containing expenses and optimizing resource allocation.
  
• Positive lease renewals and new tenant agreements are anticipated to sustain fixed rent growth, thereby boosting revenues and improving overall financial performance.
  
• Strong financial management, including maintaining a low leverage ratio and using cash flow for development, ensures financial stability while supporting growth initiatives, potentially enhancing future earnings stability.

Fibra Danhos Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Fibra Danhos's revenue will grow by 6.1% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 65.6% today to 49.0% in 3 years time.
• Analysts expect earnings to reach MX$4.0 billion (and earnings per share of MX$2.54) by about March 2028, down from MX$4.4 billion 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 7.7x today. This future PE is greater than the current PE for the MX REITs industry at 6.8x.
• Analysts expect the number of shares outstanding to grow by 1.14% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.62%, as per the Simply Wall St company report.

Fibra Danhos Future Earnings Per Share Growth

Risks

• The reliance on a single vehicle, Danhos, for the expansion into industrial developments raises concerns about whether the market values diversified vehicles, potentially impacting long-term earnings stability and revenue growth.
  
• The expiration of leases at certain office properties could lead to challenges in maintaining occupancy rates if lease renewals are not favorable, potentially affecting rental revenue and net margins.
  
• There are uncertainties with the new retail development in Oaxaca, including the project's timeline and financial viability, which could result in unexpected costs or delays impacting cash flow and future earnings.
  
• The reliance on retained cash flow and short-term revolving credit facilities to finance development might press the balance sheet, especially if market conditions change, affecting leverage and financial flexibility.
  
• Variability in rental income driven by consumer trends can be uncertain, especially if growth does not meet expectations, impacting revenue stability and thus affecting overall profitability.

Valuation

• The analysts have a consensus price target of MX$24.0 for Fibra Danhos 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$28.5, and the most bearish reporting a price target of just MX$20.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be MX$8.1 billion, earnings will come to MX$4.0 billion, and it would be trading on a PE ratio of 15.0x, assuming you use a discount rate of 14.6%.
  
• Given the current share price of MX$21.61, the analyst price target of MX$24.0 is 10.0% 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.