Mexico Industrial Real Estate Will Transition Amid Tariff Risks

Key Takeaways

• The integration of Terrafina and effective refinancing strengthen FIBRA Prologis's market leadership and financial stability, boosting potential revenue and earnings.
  
• Strategic advantages in near-shoring and record rent changes position the company for significant revenue growth and increased demand for industrial space.
  
• Trade uncertainties, leasing slowdowns, increased vacancy rates, peso devaluation, and automotive sector volatility pose significant risks to FIBRA Prologis's revenue and earnings stability.

Catalysts

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

• The integration of Terrafina has expanded FIBRA Prologis's core portfolio by 40%, solidifying its leadership in Mexico's industrial real estate sector, which is expected to boost future revenue and earnings.
  
• Increased customer activity in sectors such as electronics, medical, and appliances following tariff announcements suggests potential for revenue growth from heightened demand for space in border markets.
  
• Successful refinancing strategies aimed at replacing short-term debt with long-term financing can enhance liquidity and reduce the cost of debt, positively impacting net margins and earnings.
  
• Mexico's strategic position for near-shoring due to competitive advantages in export markets may drive a new wave of investment, increasing demand for industrial space and positively affecting revenue growth.
  
• Record rent changes on rollover of contracts due to effective mark-to-market strategies suggest potential for increased future revenue and net operating income as older contracts are renegotiated at current market rates.

FIBRA Prologis Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming FIBRA Prologis's revenue will grow by 13.1% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 236.6% today to 59.3% in 3 years time.
• Analysts expect earnings to reach MX$8.6 billion (and earnings per share of MX$5.38) by about May 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 26.5x on those 2028 earnings, up from 4.5x today. This future PE is greater than the current PE for the MX Industrial REITs industry at 4.5x.
• 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 15.9%, as per the Simply Wall St company report.

FIBRA Prologis Future Earnings Per Share Growth

Risks

• Ongoing trade uncertainty and the imposition of tariffs by the U.S. might negatively affect U.S. economic conditions, potentially reducing demand for Mexican exports and adversely impacting FIBRA Prologis's revenue streams.
  
• The potential slowdown in leasing activity, evidenced by the decreased leasing from 10.6 million square feet to 7.04 million square feet, might indicate weakening demand, risking future revenue and occupancy rates.
  
• The increase in vacancy rates by 50 basis points in key markets suggests potential challenges in maintaining high occupancy levels, which could drive rental income lower and affect net margins.
  
• Peso devaluation has partially offset rent growth and NOI increases, indicating that currency volatility could pose ongoing risks to earnings stability if the peso weakens further relative to other currencies.
  
• The significant portion of rent collections from the automotive sector, which faces potential supply chain reconfigurations and shorter leases due to uncertainty, could influence future net margins and revenue growth if the sector experiences prolonged instability.

Valuation

• The analysts have a consensus price target of MX$74.764 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$80.0, 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$14.6 billion, earnings will come to MX$8.6 billion, and it would be trading on a PE ratio of 26.5x, assuming you use a discount rate of 15.9%.
  
• Given the current share price of MX$67.43, the analyst price target of MX$74.76 is 9.8% 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.