Approval Of Next Project And Leasing Improvements Signal Positive Future

Key Takeaways

• Approval of the Fibra Next project indicates potential revenue growth through asset monetization and industrial segment expansions.
  
• Increased occupancy and rent hikes across segments may enhance revenue and margins, with sustainability efforts boosting long-term financial prospects.
  
• High leverage and increasing operational costs could hinder financial flexibility and profitability, while market uncertainties may disrupt cash flow and income stability.

Catalysts

Fibra Uno (Mexbol: FUNO11; Bloomberg: FUNO11:MM) is the first and largest FIBRA in the Mexican market.

• The approval of the Fibra Next project by Mexican tax authorities is a significant catalyst, suggesting potential growth in revenue and earnings, as it involves the carve-out and potential monetization of industrial assets.
  
• The increase in occupancy rates across different property segments, including retail and office, is expected to positively impact future revenues and net operating income as these trends indicate stronger demand and higher rental income potential.
  
• Leasing spread improvements and rent increases across the portfolio, particularly in the industrial segment, indicate potential for enhanced revenue growth and increased net margins due to higher income from property renewals and inflation-indexed contracts.
  
• The refinancing of 2026 bonds extending to 2030 reduces short-term debt obligations, potentially improving net margins due to lower interest expenses and offering more flexibility for growth investments.
  
• The focus on sustainability and LEED-certified square meters may provide long-term indirect financial benefits, such as improved occupancy rates and potential rent premiums, positively impacting future revenue streams and company valuation.

Fibra UNO Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Fibra UNO's revenue will grow by 5.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 34.2% today to 38.4% in 3 years time.
• Analysts expect earnings to reach MX$12.8 billion (and earnings per share of MX$3.34) by about March 2028, up from MX$9.7 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 9.3x today. This future PE is greater than the current PE for the MX REITs industry at 7.0x.
• Analysts expect the number of shares outstanding to grow by 0.19% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 17.94%, as per the Simply Wall St company report.

Fibra UNO Future Earnings Per Share Growth

Risks

• The company plans to internalize processes and conduct a potential IPO for Fibra NEXT, but both activities come with uncertainties regarding timing and market conditions, which could affect management focus and lead to potential cash flow disruptions. (Impact on earnings)
  
• The firm's reported net debt to EBITDA ratio of around 7x and a debt service coverage ratio of 1.6x are relatively high, indicating a significant leverage position that could pressure financial flexibility and interest expenses if not managed well. (Impact on net margins)
  
• Property taxes have been increasing significantly, more than inflation, which puts pressure on operating expenses and could affect the net operating income adversely. (Impact on earnings)
  
• Despite the office segment showing some positive recovery, the management is cautious about significant rent increases in the market overall, suggesting potential stagnation in revenue growth in that segment. (Impact on revenue)
  
• The effect of the exchange rate depreciation impacts both interest expenses and income, creating volatile financial results due to currency exposure, which could affect net income unpredictably. (Impact on earnings)

Valuation

• The analysts have a consensus price target of MX$30.37 for Fibra UNO 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$38.0, and the most bearish reporting a price target of just MX$21.2.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be MX$33.2 billion, earnings will come to MX$12.8 billion, and it would be trading on a PE ratio of 15.0x, assuming you use a discount rate of 17.9%.
• Given the current share price of MX$23.51, the analyst price target of MX$30.37 is 22.6% 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.