Biogas Transition And Dacomsa Acquisition Set To Expand Market Reach

AN
AnalystConsensusTarget
Consensus Narrative from 6 Analysts
Published
09 Feb 25
Updated
16 Jul 25
AnalystConsensusTarget's Fair Value
R$28.56
16.8% undervalued intrinsic discount
16 Jul
R$23.76
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1Y
19.4%
7D
-1.0%

Author's Valuation

R$28.6

16.8% undervalued intrinsic discount

AnalystConsensusTarget Fair Value

Last Update23 Apr 25

AnalystConsensusTarget made no meaningful changes to valuation assumptions.

Key Takeaways

  • Significant growth opportunities in Mexican and U.S. markets through acquisitions, enabling new distribution channels and increased product offerings.
  • Enhanced profitability through operational efficiency, expanded production capacity, and economies of scale, aiming for improved net and gross margins.
  • Financial strain from Dacomsa acquisition and regional economic instability, along with execution risks in expansion and restructuring, could impact Fras-le's profitability and growth.

Catalysts

About Fras-le
    Provides friction materials for braking systems and other products in Brazil, England, Argentina, the United States, China, India, Uruguay, the Netherlands, and internationally.
What are the underlying business or industry changes driving this perspective?
  • Fras-le is actively working to improve operational efficiency, such as transitioning to biogas for heating, which reduces greenhouse gas emissions by 92%. This should contribute to improving net margins through cost savings on energy expenses.
  • The acquisition and integration of Dacomsa are expected to provide substantial growth opportunities in the Mexican and U.S. markets. This is anticipated to contribute significantly to revenue growth through new distribution channels and increased product offerings.
  • The company is focused on expanding its market share in newer product lines like suspension and steering components, especially after the Nakata acquisition. This strategy aims to increase revenue by capturing untapped market segments.
  • Fras-le's ongoing investments in increased production capacity, like the substation for Fremax to offer 25% more products, are aimed at enabling further sales expansion in Latin America and the U.S. This is expected to boost future revenue and profitability.
  • By leveraging economies of scale and improved sourcing strategies post-Dacomsa acquisition, Fras-le aims to enhance profitability. This should allow for better gross margins through more cost-effective manufacturing and distribution practices.

Fras-le Earnings and Revenue Growth

Fras-le Future Earnings and Revenue Growth

Assumptions

How have these above catalysts been quantified?
  • Analysts are assuming Fras-le's revenue will grow by 20.2% annually over the next 3 years.
  • Analysts assume that profit margins will increase from 9.3% today to 9.5% in 3 years time.
  • Analysts expect earnings to reach R$656.0 million (and earnings per share of R$2.1) by about April 2028, up from R$367.7 million 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 17.3x on those 2028 earnings, down from 20.1x today. This future PE is greater than the current PE for the BR Auto Components industry at 7.1x.
  • Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
  • To value all of this in today's terms, we will use a discount rate of 18.63%, as per the Simply Wall St company report.

Fras-le Future Earnings Per Share Growth

Fras-le Future Earnings Per Share Growth

Risks

What could happen that would invalidate this narrative?
  • The acquisition of Dacomsa involves a significant financial investment, which may strain Fras-le's financials if the anticipated synergies and growth opportunities do not materialize as expected, impacting the company's net margins and earnings.
  • Argentina's economic instability, including hyper-devaluation, could continue to negatively affect Fras-le's revenues and margins in the region, particularly in light of potential inflationary pressures.
  • The expansion into the U.S. market is contingent on external factors such as changes in government policies, which could impose additional costs that might impact profitability if these are not successfully passed on to customers.
  • While organic growth has been a strong point, failure to maintain or accelerate this growth, particularly in new or competitive markets, could pressure Fras-le's revenue targets and overall financial performance.
  • The need for operational restructuring, such as the opening of a new substation and implementing new systems within Dacomsa, entails execution risks that could lead to higher-than-anticipated costs or disruptions in operations, thereby impacting earnings and cash flow.

Valuation

How have all the factors above been brought together to estimate a fair value?
  • The analysts have a consensus price target of R$25.42 for Fras-le based on their expectations of its future earnings growth, profit margins and other risk factors.
  • In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be R$6.9 billion, earnings will come to R$656.0 million, and it would be trading on a PE ratio of 17.3x, assuming you use a discount rate of 18.6%.
  • Given the current share price of R$27.73, the analyst price target of R$25.42 is 9.1% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  • 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.

How well do narratives help inform your perspective?

Disclaimer

AnalystConsensusTarget is a tool utilizing a Large Language Model (LLM) that ingests data on consensus price targets, forecasted revenue and earnings figures, as well as the transcripts of earnings calls to produce qualitative analysis. The narratives produced by AnalystConsensusTarget are general in nature and are based solely on analyst data and publicly-available material published by the respective companies. These scenarios are not indicative of the company's future performance and are exploratory in nature. Simply Wall St has no position in the company(s) mentioned. Simply Wall St may provide the securities issuer or related entities with website advertising services for a fee, on an arm's length basis. These relationships have no impact on the way we conduct our business, the content we host, or how our content is served to users. The price targets and estimates used are consensus data, and do not constitute a recommendation to buy or sell any stock, and they do not take account of your objectives, or your financial situation. Note that AnalystConsensusTarget's analysis may not factor in the latest price-sensitive company announcements or qualitative material.

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