Automation And Regulations Will Shrink Margins While Opportunities Persist

Key Takeaways

• Rapid technological change and stricter ESG standards threaten to render current fleets obsolete and require substantial investments, eroding margins and cash flow.
  
• Rising competition, fiscal constraints, and underinvestment in modernization put pressure on revenues, fleet utilization, and long-term profitability.
  
• Diversified expansion, resilient long-term contracts, strong cost control, and ESG leadership position Mills for stable growth and robust earnings across varied market conditions.

Catalysts

Operates as a machinery and equipment rental company in Brazil.

• The accelerating automation and digitalization within Brazil's construction and industrial sectors could sharply reduce the need for traditional equipment rental services, resulting in persistent revenue stagnation and rendering large segments of Mills Locação's current fleet obsolete as customers adopt more efficient, technology-driven alternatives.
  
• Stricter environmental regulations and heightened ESG standards will likely force Mills Locação to undertake heavy, recurring investments in newer, cleaner fleets, which will significantly elevate capital expenditures, compress operating margins, and reduce free cash flow available for future growth.
  
• Enduring fiscal constraints and reduced public infrastructure investment in Brazil are likely to curtail the broader market opportunity for Mills Locação, hampering any sustained topline growth and increasing the risk of asset underutilization across its expanded fleet.
  
• If Mills Locação's modernization of its rental fleet lags behind technological change, maintenance costs will escalate while asset values decline, triggering asset write-downs and sharp compressions in EBITDA margins and net profitability over time.
  
• Expansion of low-cost competition-including local players and disruptive platform-based equipment-sharing models-will intensify price competition in Mills Locação's core markets, forcing the company to accept lower contract prices, eroding both gross margins and overall earnings in coming years.

Mills Locação Serviços e Logística Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Mills Locação Serviços e Logística compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Mills Locação Serviços e Logística's revenue will grow by 13.7% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 17.4% today to 16.5% in 3 years time.
• The bearish analysts expect earnings to reach R$395.6 million (and earnings per share of R$1.94) by about July 2028, up from R$285.1 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 bearish analyst cohort, the company would need to trade at a PE ratio of 9.5x on those 2028 earnings, up from 8.8x today. This future PE is greater than the current PE for the BR Trade Distributors industry at 8.8x.
• Analysts expect the number of shares outstanding to decline by 3.79% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 21.0%, as per the Simply Wall St company report.

Mills Locação Serviços e Logística Future Earnings Per Share Growth

Risks

• Mills Locação has demonstrated consistent net revenue and EBITDA growth-net revenue rose by 16.8 percent year over year, while EBITDA grew 21.4 percent, driven by expanding solutions, productivity gains, and disciplined cost control, suggesting sustained earnings and profit margin resilience.
  
• The company's strategic focus on long-term contracts-now accounting for 47 percent of net rental revenue versus 32 percent the prior year-increases revenue predictability and makes cash flows more resilient to macroeconomic volatility, positively impacting both top-line growth and earnings visibility.
  
• Expansion into high-potential segments like Intralogistics and continued investments in Heavy equipment and formwork/shoring allow Mills to diversify its revenue streams across different industrial cycles, reducing dependence on any single sector and supporting long-run revenue growth and EBITDA stability.
  
• The successful integration of cost-effective Chinese equipment and disciplined capital allocation, supported by low leverage (net debt to EBITDA at 1.4 times), grants Mills the flexibility to optimize its asset base, manage costs, and maintain healthy net margins even in competitive market environments.
  
• Secular tailwinds, such as a robust long-term pipeline of infrastructure projects in Brazil and the company's recognized ESG leadership (reinforced by a recent international sustainability award), align with increasing public and private investment, boosting long-term demand and supporting sustained revenue and profit growth for Mills Locação.

Valuation

• The assumed bearish price target for Mills Locação Serviços e Logística is R$10.6, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Mills Locação Serviços e Logística's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of R$19.0, and the most bearish reporting a price target of just R$10.6.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be R$2.4 billion, earnings will come to R$395.6 million, and it would be trading on a PE ratio of 9.5x, assuming you use a discount rate of 21.0%.
  
• Given the current share price of R$11.09, the bearish analyst price target of R$10.6 is 4.6% lower. The relatively low difference between the current share price and the analyst bearish 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.