Fleet Renewal And Asset Recycling Will Drive Long Term Earnings Upside

Catalysts

About Armac Locação Logística e Serviços

Armac Locação Logística e Serviços provides outsourced heavy equipment rental and logistics solutions across multiple sectors in Brazil.

What are the underlying business or industry changes driving this perspective?

• The maturing owner-operator management model, with business unit leaders acting as mini CEOs, is driving disciplined capital allocation into projects with returns above 20 percent in real terms. This supports sustained EBITDA growth and higher earnings.
• Expansion of the asset store network toward a BRL 700 million annual sales capacity is unlocking rapid capital recycling from idle or noncore equipment into higher yielding fleet, boosting ROIC and accelerating revenue growth.
• Systematic fleet renewal into newer, more productive equipment is reducing maintenance frequency and downtime, raising utilization and productivity rates. This should support structurally higher rental margins and stronger operating cash flow.
• Increasing exposure to long duration logistics, port and industrial contracts, together with a growing base of smaller clients that value Armac's specialized know-how, supports a more diversified and resilient revenue mix and increases visibility on future earnings.
• Ongoing cost discipline in SG&A, combined with the use of technology and artificial intelligence in processes, is structurally lowering overhead per unit of revenue. This is creating operating leverage that should expand net margins as the company scales.

Assumptions

This narrative explores a more optimistic perspective on Armac Locação Logística e Serviços compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts. How have these above catalysts been quantified?

• The bullish analysts are assuming Armac Locação Logística e Serviços's revenue will grow by 11.6% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 2.9% today to 15.5% in 3 years time.
• The bullish analysts expect earnings to reach R$400.1 million (and earnings per share of R$1.17) by about December 2028, up from R$54.2 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 31.0x on those 2028 earnings, up from 30.0x today. This future PE is greater than the current PE for the BR Trade Distributors industry at 10.3x.
• The bullish 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 25.21%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The growth model depends heavily on scaling a relatively new ecosystem of regional partners, mini CEOs and acquisitions such as Magnus and TEGAN. If integration or governance issues emerge over time, the company may face inefficiencies, mispricing or cultural clashes that erode the current 50 percent rental EBITDA margin and slow earnings growth.
• The strategy of aggressive fleet renewal and capital recycling via asset stores requires a young, productive fleet and a deep secondary market. Management highlights that store volumes and mixes are still immature and margins are erratic, so a weaker long term resale market or execution missteps could trap capital in low return assets and pressure both ROIC and operating cash flow.
• The business remains capital intensive with net debt of BRL 1.756 billion and high interest costs absorbing a large portion of operating cash flow. If Brazilian interest rates stay structurally elevated or rise again over the coming years, deleveraging may stall and net income could be constrained by persistently high financial expenses.
• The narrative assumes that newer equipment, technology and artificial intelligence will structurally lower maintenance and SG&A. Management acknowledges temporary spikes in maintenance and erratic behavior as heavy machines are overhauled, and if these cost lines normalize at a higher base than expected, long term net margins and free cash flow generation could fall short of bullish expectations.
• Management is counting on broad based secular demand, including logistics, ports, industry, services and potentially mining. However, exposure to cyclical sectors and smaller regional clients means that any prolonged downturn in Brazilian infrastructure, industrial activity or commodity cycles could reduce utilization rates, limit new contracts and weigh on revenue growth and earnings.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bullish price target for Armac Locação Logística e Serviços is R$18.25, which represents up to two standard deviations above the consensus price target of R$8.1. This valuation is based on what can be assumed as the expectations of Armac Locação Logística e Serviços's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of R$20.0, and the most bearish reporting a price target of just R$4.3.
  
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2028, revenues will be R$2.6 billion, earnings will come to R$400.1 million, and it would be trading on a PE ratio of 31.0x, assuming you use a discount rate of 25.2%.
  
• Given the current share price of R$4.7, the analyst price target of R$18.25 is 74.2% 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.