The Sempre Novo Product Will Offer New Revenue Streams Via Second-Cycle Asset Rentals

Key Takeaways

• The Sempre Novo product and strategic fleet optimization are expected to enhance revenue growth and improve margins by ensuring high fleet occupancy.
  
• Plans to reduce leverage and potential spin-offs suggest improved financial health and expanded market opportunities through strategic commercial agreements.
  
• Weak agribusiness dealership performance, high net debt, and asset depreciation challenges could constrain financial flexibility and impact profitability and cash flows.

Catalysts

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

• The launch of the Sempre Novo product offers VAMOS a new revenue stream by renting out well-maintained second-cycle assets at more favorable terms compared to new ones, which is expected to significantly impact revenue growth in the coming years.
  
• The R$13.5 billion projected backlog of future revenues highlights strong future cash flow visibility, which is expected to support steady revenue growth and potential margin improvements by maintaining high fleet occupancy rates.
  
• The company's strategic focus on optimizing fleet usage, including increasing the occupancy rate of the rented fleet to 95%, is expected to improve net margins by enhancing operational efficiencies and reducing idle assets.
  
• VAMOS's plan to significantly reduce leverage by maintaining a CapEx deployment strategy while seeking a 3x net debt to EBITDA ratio by the end of 2025, suggests improved earnings metrics, as the cost of debt is expected to decrease, strengthening the company's financial health.
  
• The potential spin-off of VAMOS Concessionárias and subsequent commercial agreements could open up new markets and partnerships, potentially enhancing revenue streams and profitability through expanded sales and service opportunities.

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 21.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 9.9% today to 12.3% in 3 years time.
• Analysts expect earnings to reach R$1.6 billion (and earnings per share of R$0.94) by about March 2028, up from R$694.3 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.1x on those 2028 earnings, up from 6.3x today. This future PE is greater than the current PE for the BR Transportation industry at 7.2x.
• Analysts expect the number of shares outstanding to decline by 0.17% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 19.24%, as per the Simply Wall St company report.

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

Risks

• The company's ROIC has decreased, primarily due to weak performance in the agribusiness dealership segment and higher effective income tax, impacting overall profitability and financial returns.
  
• The repossession of assets has affected rental operating profit and revenue, with a significant financial impact from related costs such as legal fees and preparation for asset resale, which could lower net margins.
  
• Despite a focus on deleveraging, the company's net debt and leverage remain high, with R$10.7 billion in net debt, which could constrain financial flexibility and impact earnings.
  
• Challenges in the agribusiness sector, including volatile commodity prices and reduced demand for agricultural machinery, could continue affecting dealership revenues and working capital.
  
• There is a risk that further depreciation of assets beyond the current 7% average forecast could be necessary if truck values normalize, potentially impacting future net income and cash flows.

Valuation

• The analysts have a consensus price target of R$10.4 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$5.6.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be R$12.6 billion, earnings will come to R$1.6 billion, and it would be trading on a PE ratio of 12.1x, assuming you use a discount rate of 19.2%.
• Given the current share price of R$4.08, the analyst price target of R$10.4 is 60.8% 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.