Localiza (RENT3): Focusing on synergies, Morgan Stanley and JPMorgan raised the recommendation and price target;  Stocks close higher

Localiza (RENT3): Focusing on synergies, Morgan Stanley and JPMorgan raised the recommendation and price target; Stocks close higher

Nearly two months after the completion of Localiza’s (RENT3) merger with Unidas, analysts began calculating the gains that such a move would bring to the resulting company. On Tuesday (30), Morgan Stanley and JPMorgan raised their recommendations for common stock of new company The equivalent of “buying”. Shares advanced 1.43%, at 62.23 Brazilian reais, far from the maximum, but managed to close with gains in the session of the sharp decline of the Ibovespa index, which fell by 1.68%.

This step is due to a number of factors. The first is that business synergies are close to becoming a reality. We expect that most of the merger-related savings of around R$450 million will be realized by the end of 2023, mainly contributing to Ebitda’s 30% annual growth. [lucro antes de juros, impostos, depreciação e amortização, na sigla em inglês] which we expect for next year,” the Morgan Stanley team led by Josh Melberg opens.

According to US bank specialists, the main benefits in terms of synergies will come from reduced selling, general and administrative expenses (SGA). A reduction in the cost of goods sold (COGS) should also have a positive effect on the balance sheet, especially with regard to vehicle maintenance and greater discounts on purchases from vehicle suppliers, due to the larger scale.

JPMorgan follows suit.

We update Localiza’s common stock recommendation to overweight Based on more optimistic assumptions after the founding of Unidas,” explains banking analyst Guilherme Mendes. “The company has shown strong operating performance, although we still have a cautious view due to uncertainty about growth and interest rates in Brazil.”

The bank claims it’s already fully integrating Unidas’ operations into its accounts – although the new company, so far, hasn’t released any numbers yet. “We are using historical data related to the simplified sum of the numbers for Localisa and Unidas. Once the third-quarter results are released, we think the company should provide some preliminary numbers,” they highlight.

Localiza can surf in a positive mix of scenery and volume

In addition to benefiting from the synergies created by the merger, Localiza, according to the JP analyst, also has everything to take advantage of sequential improvement in auto production.

According to data from the National Association of Automobile Manufacturers (Anfavea), Brazilian auto production in 2022 is expected to grow by 4% year on year, to 2.2 million units, with a large part of production concentrated between August and August. Dec.

“we think that players Car rental companies should be the main beneficiary of this improvement, given the reduced access of individuals to purchases, due to higher financing rates,” explains Mendes.

Fleet renewal in the car rental sector leads to lower maintenance costs. Localiza has chosen, throughout 2021, to increase the average life of its total number of vehicles, having also spent more on repairs.

“Operationally, Localiza and Movida (MOVI3) have taken different approaches over the past year, with the former increasing the average lifespan of their fleet to record levels, while the latter accelerating the purchase of new vehicles and renewing their fleet.” JP analysts commented. “Now, Localiza will acquire more vehicles in succession, accelerating daily rentals and working with a more aggressive pricing strategy.”

In this regard, Morgan Stanley says, Localiza should benefit from its sheer size – the combined company has a fleet about 2.4 times larger than Movida, which comes in second, with a 50% market share in Rent a car (RAC) and 35% in fleet management.

Movida, according to analysts, still has to provide “friendly” competitive dynamics in the near future, as it has a high multiplier efficiency.

The used car part must have a “soft landing”

Despite the growth in auto production, the bank isn’t seeing new car prices drop significantly, as the localesa used car business is still up and down “softly” — after a period of high margins.

“Depreciation rates come back close to an average of 4% of the present value of the fleet. We believe this scenario is supported by the estimated residual value reserve of more than R$2.5 billion (in terms of gross profit) that New Localisa has in its fleet as a result of the 25% increase in new car prices since 2022 and they indicated that our expectation is that new car prices will not drop significantly in the future.”

With the crisis in the car production chain, leasing companies recorded strong gains in their business of reselling used cars, got high prices for them, and increased their value.

“Our positive view is also supported, to some extent, by cost mitigation due to higher volume, as well as by an increase in the share of car sales in Brazil,” says Morgan Stanley.

Overall, finally, the two banks see the car rental segment still being able to grow significantly, with plenty of markets to be explored.

“We see good long-term growth potential for the sector, given the high volume Upside down in the longer lease segment to individuals and assessing the still-low penetration on the corporate side of fleet management,” says Morgan Stanley.

JP notes that despite the challenging economic environment, leasing companies have been able to maintain good profitability and pass on capital costs, with positive demand.

However, this bank points out that higher car consumption, lower profit margins on used cars, and higher cost of debt would slow growth. However, this does not change the fact that the company is trading at an attractive multiplier.

JP raised its target price for Localiza common stock from R$65 to R$76.5 (20.8% up from today’s opening price). In turn, Morgan’s price target was raised from R4 66 to BRL 77 (a 21.6% increase).

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