Authorization From Brazilian Central Bank Will Unlock New Financial Opportunities

Key Takeaways

• Strategic focus on leveraging existing assets like embedded finance and ERP systems to boost revenue and market share.
  
• Share buyback program and focus on operational efficiency to increase shareholder value and profitability.
  
• Below-expectation revenue growth, restructuring impact, acquisition integration challenges, Brazil's macroeconomic hurdles, and looming financial obligations could hinder Locaweb’s financial performance and flexibility.

Catalysts

Offers hosting, software licensing, and technical support services in Brazil.

• Locaweb's strategic plan includes accelerating growth through leveraging existing assets such as embedded finance and ERP systems, which could lead to increased revenue and market share in their sectors.
  
• The company has focused on increasing operational efficiency and profitability without major new investments, aiming to increase net margins and generate higher free cash flow.
  
• Locaweb is planning a significant share buyback program, intending to return value to shareholders and potentially increase Earnings Per Share (EPS) through reduced share count.
  
• They have obtained authorization to be a payments institution by the Brazilian Central Bank, unlocking potential for increased TPV (Total Payment Volume) and revenue streams from financial services.
  
• The simplification of their operations and offerings could enhance customer journey and satisfaction, potentially leading to higher customer retention rates and increased subscription revenues.

Locaweb Serviços de Internet Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Locaweb Serviços de Internet's revenue will grow by 9.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.1% today to 11.5% in 3 years time.
• Analysts expect earnings to reach R$208.6 million (and earnings per share of R$0.37) by about April 2028, up from R$42.2 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 30.1x on those 2028 earnings, down from 42.5x today. This future PE is lower than the current PE for the BR IT industry at 42.4x.
• Analysts expect the number of shares outstanding to grow by 0.58% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 19.78%, as per the Simply Wall St company report.

Locaweb Serviços de Internet Future Earnings Per Share Growth

Risks

• The growth in Locaweb's consolidated net revenue was below expectations, only a 6% increase, indicating a potential slowdown and signaling that the company may not be fully capitalizing on its market potential, which could impact future revenue prospects.
  
• The financial impact of the restructuring of the subsidiary Squid negatively affected the consolidated results in 2024, showing a potential risk if similar restructuring challenges arise, which could affect profitability and net margins.
  
• Despite efforts to integrate acquisitions, the complexity of managing and simplifying operations with over 16 acquired companies might pose execution risks, potentially impacting financial efficiency and earnings.
  
• The challenging macroeconomic situation in Brazil, particularly affecting small and medium-sized businesses, could limit the company's growth in e-commerce and impact revenue and profit scalability.
  
• The financial burden of earnout payments, notably a significant payment of R$230 million expected in 2025, could strain cash flow and limit financial flexibility for reinvestments or shareholder returns.

Valuation

• The analysts have a consensus price target of R$6.06 for Locaweb Serviços de Internet 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 R$7.2, and the most bearish reporting a price target of just R$4.5.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be R$1.8 billion, earnings will come to R$208.6 million, and it would be trading on a PE ratio of 30.1x, assuming you use a discount rate of 19.8%.
• Given the current share price of R$3.03, the analyst price target of R$6.06 is 50.0% 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.