Terrafina Acquisition Will Create Largest Industrial REIT In Latin America, But Tariff Uncertainties May Impact Revenue

Key Takeaways

• The acquisition and integration of FIBRA Terrafina position FIBRA Prologis as a leader in industrial real estate in Latin America, potentially boosting revenue and market share.
  
• Investment in ESG initiatives, alongside asset recycling strategies, enhances financial flexibility and focuses on core markets, potentially strengthening earnings and attracting ESG-focused investors.
  
• Uncertainty in tariffs and geopolitical conditions slows leasing, raises vacancies, and affects revenue, while acquisition costs and asset sales impact short-term earnings and liquidity.

Catalysts

A leading owner and operator of Class-A industrial real estate in Mexico.

• The acquisition of FIBRA Terrafina and subsequent integration has positioned FIBRA Prologis as the largest publicly traded industrial real estate company in Latin America, potentially increasing revenue through an expanded customer base and market share.
  
• The strong performance of consumption markets, driven by high e-commerce growth and increased retail sales, especially in Mexico City and Guadalajara, is expected to continue supporting revenue growth and operational stability.
  
• The company's significant rent renewal growth of 61%, driven by strong customer relationships and investment in properties, suggests potential for increased net operating income (NOI) and improved net margins.
  
• FIBRA Prologis's strategy of asset recycling and dispositions of non-core assets from the Terrafina acquisition could enhance financial flexibility and focus on core high-performing markets, potentially strengthening overall earnings.
  
• The commitment to further investments in green initiatives and ESG compliance, such as increasing solar capacity, could improve operating efficiencies and attract more ESG-focused investors, contributing to long-term earnings growth.

FIBRA Prologis Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming FIBRA Prologis's revenue will grow by 11.9% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 236.6% today to 61.2% in 3 years time.
• Analysts expect earnings to reach MX$8.6 billion (and earnings per share of MX$5.38) by about April 2028, down from MX$23.8 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 26.8x on those 2028 earnings, up from 4.3x today. This future PE is greater than the current PE for the MX Industrial REITs industry at 4.3x.
• Analysts expect the number of shares outstanding to grow 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 15.92%, as per the Simply Wall St company report.

FIBRA Prologis Future Earnings Per Share Growth

Risks

• Uncertainty regarding tariffs and geopolitical conditions has led to slowed decision-making and leasing activity in manufacturing markets, potentially impacting future revenue growth.
  
• The increase in period-end vacancy in border markets from 1.6% to 5.7%, mainly due to slower decision-making from uncertainty regarding tariffs, could negatively affect net margins.
  
• A consumption slowdown since July, despite a 3% increase in real retail sales, may signal weakening demand, impacting revenue stability in logistics and consumption-related facilities.
  
• The initial one-time acquisition expenses of $9 million related to the purchase of Terrafina, impacting 2024 financials, could suppress short-term earnings.
  
• The process of selling noncore assets from Terrafina may face delays due to antitrust approvals and other external factors, potentially affecting liquidity and balance sheet management.

Valuation

• The analysts have a consensus price target of MX$75.597 for FIBRA Prologis 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$90.0, and the most bearish reporting a price target of just MX$64.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be MX$14.1 billion, earnings will come to MX$8.6 billion, and it would be trading on a PE ratio of 26.8x, assuming you use a discount rate of 15.9%.
• Given the current share price of MX$64.31, the analyst price target of MX$75.6 is 14.9% 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.