Focusing On Core Leasing Will Boost Efficiency In Brazil

Key Takeaways

• Focus on core Leasing segment and contract extension strategy could improve operational efficiency and enhance net margins and earnings.
  
• Adjusting Leasing prices to interest rates aims to preserve ROIC spread, supporting sustainable earnings growth and stable net margins.
  
• Narrow focus and sector-specific risks, reduced CapEx, credit risk from long-term leases, asset repossessions, and interest rate exposure may challenge revenue and income stability.

Catalysts

Together with its subsidiaries engages in the leasing, reselling, and selling of trucks, machinery, and equipment in Brazil.

• The spin-off of the dealership business has allowed Vamos to focus on its core Leasing segment, potentially improving operational efficiency and scaling its heavy vehicle leasing business in Brazil. This focus could enhance revenue and EBITDA margins.
  
• The company plans to extend and renew contracts using existing assets, which leads to higher utilization rates and reduced need for new CapEx. This strategy could improve net margins and reduce leverage, positively impacting earnings.
  
• Increased sales of used vehicles and expansion of its sales network could lead to additional revenue streams and improved operational efficiency, thus enhancing net margins and earnings.
  
• The focus on contract extensions with existing assets can provide more predictable and recurring revenue streams, supporting stable and potentially higher net margins over time.
  
• The company aims to preserve its unique ROIC spread by adjusting Leasing prices in line with interest rate changes, which could maintain or even improve net margins and support sustainable earnings growth.

Vamos Locação de Caminhões Máquinas e Equipamentos Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Vamos Locação de Caminhões Máquinas e Equipamentos's revenue will grow by 23.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 15.4% today to 16.8% in 3 years time.
• Analysts expect earnings to reach R$1.5 billion (and earnings per share of R$0.75) by about May 2028, up from R$724.9 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting R$1.8 billion in earnings, and the most bearish expecting R$1.1 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.5x on those 2028 earnings, up from 7.7x today. This future PE is greater than the current PE for the BR Transportation industry at 9.0x.
• Analysts expect the number of shares outstanding to decline by 0.44% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 26.12%, as per the Simply Wall St company report.

Vamos Locação de Caminhões Máquinas e Equipamentos Future Earnings Per Share Growth

Risks

• The spin-off of the dealership business may reduce revenue diversification and increase focus on a single segment, potentially exposing the company to sector-specific risks, which could impact revenue stability.
  
• The anticipated lower net CapEx in recent years may signal reduced investment in new assets, potentially limiting future revenue growth opportunities in the Leasing segment.
  
• Increased dependence on long-term leasing contracts and contract extensions could expose the company to credit risk, affecting net margins if customers default on long-term commitments.
  
• Asset repossessions, particularly in the Grain Transportation sector, have affected utilization rates and could continue to impact revenue generation if not effectively managed.
  
• High exposure to interest rate changes due to CDI-linked debt could increase financial costs, thereby affecting earnings and reducing net income growth potential.

Valuation

• The analysts have a consensus price target of R$8.583 for Vamos Locação de Caminhões Máquinas e Equipamentos 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$15.0, and the most bearish reporting a price target of just R$4.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be R$8.8 billion, earnings will come to R$1.5 billion, and it would be trading on a PE ratio of 12.5x, assuming you use a discount rate of 26.1%.
• Given the current share price of R$5.16, the analyst price target of R$8.58 is 39.9% 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.