Internalization And Rent Increases Expected To Boost Revenue, But High Leverage And Currency Risks May Impact Margins

Key Takeaways

• Rent increases and high occupancy rates, particularly in the Industrial, Retail, and Office segments, are expected to drive revenue and stabilize net margins.
  
• Newly acquired properties and development projects are likely to enhance investment property growth, increasing earnings and asset valuation.
  
• Dependence on foreign currency debt poses financial risks due to interest fluctuations, increased expenses, and potential impact on overall earnings and net margins.

Catalysts

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

• Future growth in the office and retail sectors is anticipated due to strengthening accounts receivable and invoicing, which may positively impact revenue.
  
• Rent increases through inflation pass-through and lease renewals, particularly in the Industrial and Retail segments, are expected to enhance revenue and net operating income.
  
• Continued gains in occupancy rates, especially in the Office segment, without reducing rental prices, are likely to support future revenue growth and stabilize net margins.
  
• Newly acquired properties and ongoing development projects like Samara Satellite contribute to investment property growth, potentially increasing earnings and asset valuation.
  
• The expected internalization process might reduce operational costs and improve efficiency, enhancing net margins and overall earnings.

Fibra UNO Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Fibra UNO's revenue will grow by 5.9% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 43.0% today to 32.6% in 3 years time.
• Analysts expect earnings to reach MX$10.4 billion (and earnings per share of MX$2.55) by about December 2027, down from MX$11.5 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting MX$11.9 billion in earnings, and the most bearish expecting MX$8.2 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 20.2x on those 2027 earnings, up from 7.1x today. This future PE is lower than the current PE for the MX REITs industry at 28.7x.
• Analysts expect the number of shares outstanding to grow by 2.18% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 17.58%, as per the Simply Wall St company report.

Fibra UNO Future Earnings Per Share Growth

Risks

• Changes in exchange rates, such as the depreciation of the Mexican peso against the U.S. dollar, increase interest expenses on U.S. dollar-denominated debt, affecting overall earnings negatively due to higher financial costs.
  
• The office segment, while improving, still faces challenges in terms of occupancy, with some leases experiencing negative rent growth, posing a risk to rental revenue recovery and overall margins.
  
• Despite their strategy to maintain distribution levels, the decision to prioritize cash distribution over debt reduction could lead to higher leverage ratios, potentially increasing financial risks and impacting net margins.
  
• Inflationary pressures leading to increased costs in services and materials could negatively impact operating expenses, potentially reducing net operating income margins if not managed efficiently.
  
• High leverage and dependence on foreign currency debt expose the company to interest rate fluctuation risks, which could affect financial stability and net income if market conditions worsen.

Valuation

• The analysts have a consensus price target of MX$31.78 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$25.8.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be MX$31.8 billion, earnings will come to MX$10.4 billion, and it would be trading on a PE ratio of 20.2x, assuming you use a discount rate of 17.6%.
  
• Given the current share price of MX$21.46, the analyst's price target of MX$31.78 is 32.5% 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.