Logistics And Intralogistics Expansion Will Drive Durable Long-Term Cash Generation

Catalysts

About SIMPAR

SIMPAR is a diversified Brazilian holding company that operates asset intensive, service oriented businesses across logistics, vehicle rental and leasing, infrastructure and automotive distribution.

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

• Scaling long term logistics and intralogistics contracts through JSL and the new INTRALOG platform, which is expected to deepen customer relationships in essential supply chains and support sustained growth in service revenue and EBITDA.
• Structural shift toward outsourcing fleets and equipment via VAMOS and Movida, combined with contract extensions and Sempre Novo leasing, which is expected to lift recurring lease revenue while requiring proportionally lower net CapEx, supporting free cash flow and net margins.
• Ramp up of port and infrastructure concessions under CS Infra with high contracted utilization and quasi take or pay features, positioning these assets to contribute more predictable cash generation as they reach full operation.
• Ongoing optimization of the dealership platform at AUTOMOB after a heavy investment cycle, where maturing stores, F&I penetration and higher sales per store may monetize the installed base and support operating margins with limited incremental CapEx.
• Group wide focus on pricing discipline, cost reduction and asset turnover in a high interest rate environment, which is reflected in productivity metrics and leverage and is expected to influence ROIC, earnings and deleveraging at the holding level.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming SIMPAR's revenue will grow by 9.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from -1.5% today to 4.4% in 3 years time.
• Analysts expect earnings to reach R$2.5 billion (and earnings per share of R$2.33) by about December 2028, up from R$-638.7 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting R$3.8 billion in earnings, and the most bearish expecting R$1.4 billion.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 5.9x on those 2028 earnings, up from -6.8x today. This future PE is lower than the current PE for the BR Transportation industry at 12.2x.
• Analysts expect the number of shares outstanding to decline by 0.74% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 27.65%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The group remains loss making at the consolidated level despite growing revenue and EBITDA, and if Brazil sustains a prolonged period of high real interest rates similar to 2016, interest expenses could continue to offset operating gains and delay or prevent a sustained recovery in net income and earnings growth.
• SIMPAR’s strategy of extracting value from a large installed asset base with structurally lower net CapEx assumes resilient demand and disciplined pricing across logistics, rentals, ports and dealerships. However, a cyclical slowdown in transportation, agribusiness or consumer activity could weaken contract renewals, reduce used asset sales and pressure revenue and operating margins.
• Several key growth platforms such as INTRALOG, CS Infra ports and the expanded dealership network are only now ramping toward maturity. Execution missteps, slower than expected volume build up or weaker than expected returns on large sunk investments could lower productive ROIC and depress earnings versus expectations.
• The plan to deleverage the holding and subsidiaries relies on strong cash generation, potential asset sales and maintaining access to long term funding at attractive spreads. Any tightening in credit markets, failed divestments or deterioration in perceived risk could keep leverage elevated and constrain future earnings and equity value creation.
• Segment specific risks, including prolonged weakness in the agricultural cycle affecting AUTOMOB’s farm equipment business, higher repossessions in VAMOS, or regulatory and demand risks in new infrastructure concessions such as ports and ferry services, could lead to further impairments or underutilized assets, reducing revenue growth and compressing net margins.

Valuation

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

• The analysts have a consensus price target of R$8.47 for SIMPAR 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$11.0, and the most bearish reporting a price target of just R$6.3.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be R$57.3 billion, earnings will come to R$2.5 billion, and it would be trading on a PE ratio of 5.9x, assuming you use a discount rate of 27.7%.
  
• Given the current share price of R$5.12, the analyst price target of R$8.47 is 39.5% 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.