CFA Institute Research Challenge

Hosted by
CFA Society Brazil
Team C
 Team C | Student Research LOCALIZA
Report is published for educational purposes only by students Transportation/ Car Rental
competing in the CFA Institute Research Challenge
São Paulo Stock Exchange (“BM&FBovespa)
Closing Price: BRL 40.80 Recommendation: Sell (24% Downside)
Date: 14 - Oct - 2016
Ticker: RENT3 USD/BRL: 3.18 Target Price: BRL 31.00 (USD12.80)

Summary Table 2014 2015 2016E 2017E 2018E 2019E

Exhibit 1: Market Profile End of period fleet (th) 112 111 121 132 141 153
Net Revenues (R$ mn) 3,892 3,928 4,326 5,142 5,695 6,206
Market Profile EBITDA (R$ mn) 970 935 1,039 1,183 1,327 1,513
Ticker RENT3.SA EPS (R$) 1.94 1.90 1.97 2.04 2.37 2.84
Current Price BRL 40.80 Dividend Yield 5.7% 7.8% 2.6% 2.5% 2.8% 2.7%
52-weeks Low/High 19.98 /43.92 P/E 17.42x 14.42x 9.00x 8.08x 6.92x 5.90x
ADTV (mn, 1yr) USD 9.01 EV/EBITDA 6.66x 9.37x 6.89x 6.05x 5.39x 4.73x
Source: Company Data, Team Estimates
Shares Outstanding (mn) 211,80
Free Float 53% Localiza: Pulling off the Highway
Market Cap (mn) BRL 8,641.20
We issue a SELL recommendation on Localiza Rent a Car (RENT3) with a YE17 target price of BRL
Net Debt (mn) BRL 1,627.30
31/share, implying 24% downside from its closing price of BRL 40.80 on October 14, 2016. Our
Net Debt to EBITDA LTM 3.22x recommendation is primarily driven by the prospect of used car market deterioration, pressure in
Div. Yield 2016E 1.29% the competitive scenario, and uncertainties regarding management’s succession.
Beta (60 months) 0.82 A possible comeback in demand for new cars should shrink used car sales back to historical levels,
P/E (2016E/2017E) 21.98x / 20.14x increasing depreciation and fleet renewal costs. Localiza’s Used Car segment is a cornerstone in
P/B 3.80x their car business cycle and has accounted on average for 51% of consolidated revenues in the last
EV/EBITDA (16E/17E) 10.29x / 9.44x five years. As FX depreciated and credit for auto loans dried up in the last two years, new car prices
and demand for second hand vehicles soared up. This brought car depreciation to historically low
Source: Bloomberg and Team Estimates levels, allowing Localiza to narrow the price of car sold vs. price of car purchased, boosting its over-
all results. With signs of recovery ahead, we foresee the reverse trend hurting Localiza’s results.
Although Localiza is the current market leader, we foresee a turbulent market consolidation in the
Exhibit 2: RENT3 vs. IBOV short and medium term, mainly due to: i) fiercer competition in the Car Rental market, on the back of
an aggressive strategy and higher investments in innovation and customer service, and ii) potential
highly-capitalized competitors fueling expansion plans.
If Localiza’s management is praised as the best in class, what happens when these key people re-
tire? Fewer changes are able to generate as much fear or insecurity in a company as a succession.
Four of the most important executives in the company will retire over the next five years. This adds
a substantial amount of risk to Localiza’s operational excellence, given management’s deep know-
how and its role in perpetuating the corporate value through economic cycles.
Localiza is the best car rental company in Latam, but it is overly priced by the Market. We derived our
price target over a DCF-based analysis and validated our result by the following three methodolo-
gies: (i) Trading Multiples; (ii) Discounted Dividend model; and (iii) a “Fair” Multiple analysis indi-
cating a substantial downside of around 31% related to our estimate of 15.2x 2017E P/E.
How can we be wrong? The main risks to our Sell rating on Localiza are based on: i) less competitive
Source: Bloomberg scenario; (ii) a worsening of the macro scenario positively impacting used car sales; (iii) mainte-
nance of high inflation levels bleeding efficiency and cost cutting policies; and (iv) other risks that
Exhibit 3: Fair Value Estimates were evaluated over a risk matrix and modelled through a Monte Carlo simulation.

Valuation Price Target Recent News

DCF BRL 31.00 “After recession, companies are preparing to be quoted at the Stock Exchange”. In September of
2016, a lot of journals speculated about the possibility of Movida and Unidas’ plan to make an IPO
DDM BRL 26.00
until 2017. In a scenario of credit contraction and high interest rates, opening capital becomes
more attractive, being a relatively easier cheaper way of financing. If this operation results in invest-
Multiples BRL 22 .00 - 27.00 ment increases, Localiza can be negatively affected by competitive intensification. (Exame 09/2016)

Book Value YE17 BRL 11.65 “Movida approved capital increase from JSL S.A.”. In September 2016, Movida announced an addi-
tional capital contribution of BRL 121mnfrom JSL S.A. After adding this amount, the company’s
Source: Team Estimates social capital totaled BRL 716mn, fueling the continuity of its fast expansion plan and potentially
signaling to the market a possible spin-off move.

1
Exhibit 4: Car Rental is 1/3 of revenues Business Description
Localiza (RENT3) is the largest car rental company in Latin America, accounting for 22.4% of the Car
Rental market in Brazil and 7.5% of fleet outsourcing. Founded in 1973 in the city of Belo Horizonte,
Localiza has a network of 565 car rental branches spread across Brazil and seven other Latin Ameri-
can countries. The company’s business platform is made up of three main segments: (i) Car Rental, (ii)
Fleet Rental and (iii) Franchising (Exhibit 4). As a strategy to improve efficiency and create synergy in
its operations, the company vertically integrates its main segments through the sale of used cars.
Car Rental: Localiza “rent-a-car” is the company’s flagship line of business, with 328 own agencies and
78,352 cars under ownership. This network includes 105 airport branches (~ 20% of total agencies;
Appendix 1) and a presence in 361 Brazilian cities. Car Rental is broken down to leisure, mini-lease
(monthly rental) and insurance replacement accounting. In this segment, Localiza differentiated itself
from its competitors through the creation of a loyalty program, the adoption of more technological
approaches to customer service, raising the level of professionalism of its employees, and a complex
IT-intensive system of pricing rentals that integrates its large database of demand behavior (Appendix
2). In regards to Localiza’s auto fleet efficiency, its utilization rate of 73%, the best in the sector. Addi-
Source: Company Data, as of 2Q16 tionally, Localiza’s fleet depreciation rate is carefully managed: the company has an advanced system
to ensure efficient and timely maintenance. This efficiency is compounded by gains in bargaining
power,-that promote higher profits. Also, its price spread between a vehicle’s purchase and its even-
Exhibit 5: Car Rental Business Cycle tual sale is considerably less than Unidas’ at 20% YE15 (Appendix 3), leading to a more profitable used
car sales operation.
Fleet Rental: Localiza “fleet solutions” provides corporate clients with long-term fleet rental contracts,
ranging from 12 to 48 months. Clients are able to customize their fleet, which is then bought, li-
censed and maintained by Localiza. This division has a fleet of 32,726 cars rented to over 880 clients
and represents 7% of market share in vehicles. Localiza seeks to differentiate itself from competition
by offering a customized online tool (Appendix 2) that allows managers to know the location and
speed of every vehicle in their fleet as well as providing information that supports decision making,
such as maintenance schedules.
Used Cars: To maximize value creation in the Car and Fleet Rental divisions, Localiza sells 78.5% of its
vehicles to consumers through its own network of car dealers. Vehicles from Car Rental are usually
decommissioned for sale after 12 months (Exhibit 5), while Fleet Rental vehicles are sold after 36
months. Localiza currently operates a network of 78 used car dealers. Having its own car dealers
allows the company to sell its cars at retail prices rather than at wholesale prices, and this gain com-
Source: Team C Research
pensates the costs of owning such a structure. We highlight here that OEMs in Brazil do not engage in
repurchase agreements with car rental companies (Please refer to Appendix 4), unlike what is prac-
ticed in the US. Moreover, this business characteristic allows Localiza to operate with a buffer in its
fleet, since cars from the Car Rental that have been decommissioned for sale are quickly put back
Exhibit 6: Company founders hold less into operation if there is a sudden surge in demand.
than 30% of the shares...
Franchising: Localiza began its franchise business in 1983 as a response to the Brazilian debt crisis
Main Shareholders Stake % which made capital scarce and expensive. At the moment, this segment contributes to expand the
Salim Mattar 6% company’s network. Out of the 237 franchises, 166 are located in Brazil while the other 71 are dis-
persed in Argentina, Colombia, Chile, Ecuador, Paraguay, Peru and Uruguay. In those cases, the com-
Eugenio Mattar 7% pany does not own the fleet of its franchisees. Although this segment accounts for a insignificant
Antonio Resende 9% amount of Localiza’s revenues, it continues to be a positive brand builder for the company.
Flávio Resende 6%
Lazard 13%
Management & Corporate Governance
Invesco 5% Localiza is listed on the São Paulo Stock Exchange since 2005 and in 2012 it listed ADR level 1. In
terms of corporate governance, Localiza is listed in BM&F-Bovespa in the segment which complies
Treasury Stock 2% with the higheste CG standards, called "Novo Mercado". These four rules aim to protect minor share-
Free Float 53% holders and improve transparency in financial reporting. As Exhibit 6 shows, Localiza has a diluted
Source: Company Data of 2015 ownership, with 53% of free-float shares.
Social and Environmental Polices. Transportation is a natural potentially polluting activity and the com-
pany takes part in various sustainable campaigns (Appendix 5), having 75% of its fleet classified as
being more efficient and with lower emission of pollutants, as well as including hybrid cars to its fleet
mix.
Exhibit 7: ... and they all have seats on
the board Strong presence of its founding fathers. Localiza’s executive management team has been a key driving
force behind the company’s overall success. All four co-founders of Localiza: Salim Mattar, Eugênio
Member Position Mattar, Antonio Resende and Flávio Resende maintain active roles within the company (Appendix 6).
Salim Mattar Executive Chairman They all have seats on the Board and the other 50% is composed by independent members (Exhibit
7). A unique set of skills has prevailed in its executive team throughout the years: service manage-
Antônio Resende Vice-President ment, financial management and fleet management, and the company must maintain this in order to
Eugênio Mattar Member keep navigating through economic cycles.
Flávio B. Resende Member Compensations and Stock Option Plan. In 2015, Localiza’s executive officers received 69% of its total
Letícia Costa Independent Member annual compensation as fixed salaries and other fixed benefits; 12% was received as post-
employment benefits and 19% as variable compensation -- 10% stock-based compensation and 9%
José Galló Independent Member performance bonuses. Localiza could do better in terms of making sure that management is paid in a
Oscar Bernardes Independent Member way that ensures their interests are aligned with shareholders, especially now that the company’s
Stefano Bonfiglio Independent Member founders are nearing retirement age. Also, we highlight that in the last year of the Second Stock Op-
tion Plan, 2011, 499 employees were eligible to receive stock options as compensation. In 2015, the
Source: Company Data of 2015 Third Stock Option Plan made only 17 employees eligible. We think this is a substantially negative
trend for a company that aims for professionalism. Furthermore, in order to discourage hostile takeo-
vers and protect shareholders, Localiza has a poison pill in its bylaws requiring the acquirer to make a
public tender offer to all shareholders and pay everyone who sold shares on the stock exchange dur-
ing a period of six months prior to the acquisition the difference of the earlier selling price and the
tender offer price.

2
Exhibit 8: Market Share Evolution
Industry Overview & Competitive Positioning
In 2015, Brazilian economic recession stroked the entire services sector, with its aggregate value
decreasing 2.7% YoY. Among the services segments, transportation diminished 6.5% YoY (IGBE).
According to Euromonitor projections, car rental will register a negative 1% retail value CAGR 2015-
2020, reaching, at constant 2015 prices, R$ 3.1bn in 2020.

Source: Euromonitor
Exhibit 9: Industry Fleet Composition
When will the trigger be pulled towards consolidation? In 2015, car rental sector represented approx-
imately 0.08% of Brazilian GDP, whereas in the US it is 0.14%. Comparing to a mature market, we
see the five largest players in Brazil denoting only 45% of the sector in 2015, while in the US the
four largest companies accounted for 93%. Despite Brazilian lower consolidated market, we have
seen a recent increase in price competition, with daily rental rates coming close together (Exhibit 6)
and driving up peers’ portion of total industry revenues. Although Localiza is the current market
leader, we foresee a slower path to fully achieve market consolidation. In Brazil, car rental market
presents a distinction challenge, given its concentration of entry-level car models and few vehicle
suppliers.
Exhibit 10: Movida Vs Localiza’s Daily Rates, Pressure Endurance

Source: ABLA

Source: Company data, Team C Research

Exhibit 11: Business and Tourism as a %

of Total Car Rental Industry Brazil is not for everyone. Brazilian poor infrastructure, economic distress and medium income per
capita are only some of the factors that contribute to a challenging business environment for car
rental companies. In this matter, according to OMS, in 2015, it was the Latin America country with
the greatest number of traffic deaths per capita (23.4 per 100th inhabitants), causing companies
like Localiza the need to sustain an adverse condition. Additionally, nominal interest rates in Brazil
are among the highest in the world (Appendix 7), reaching 14% p.a., making leverage potentially
dangerous and fleet renewal expensive
Demand drivers: According to ABLA, 50% of the Car Rental Industry fleet is of entry-level cars (Exhibit
9). Rental Car business is mainly predominant in large metropolitan areas and Brazilian airports,
attending three types of customers: companies that outsource their fleet, tourists and business
travelers.
Outsourcing is a relevant source of revenue for car rental businesses. According to ABLA, Fleet Rental
represented 56% of all vehicles rented in 2015. Despite being the largest sector contributor, out-
sourcing demand had a reduction from 2013 data of 58% car rented. Infrastructure projects invest-
Source: ABLA
ments are an important generating pole of business for outsourcing companies. However, ABLA
expects that these investments may take time to become a reality, based on the long period taken
Exhibit 12: FX rates BRL/US to start previously infrastructure projects in Brazil.
Business traveler’s demand is highly dependent upon overall level of business activity. In 2015, real
4.1
3.8
investments fell 18%, while business travel spending in Brazil declined 5%. Hence, business demand
3.5 has been losing market share – accounting for 25% of all cars rented in 2014 and 21% in 2015
3.2 (Exhibit 11). Given the recent macroeconomic turmoil, as of July 2016, real investment has de-
2.9 creased 8% in 2Q and is expected to drop 8.5% this year, according to GBTA (Global Business Travel
2.6 Association) before it starts to rebound after 2016. According to ABRACORP, business travel ac-
2.3 counts for 55.4% of Localiza’s net revenues in 2015. ABLA has a conservative outlook for 2016,
2 expecting that the volume of large companies’ activities (responsible for increasing business travel-
er’s demand) remain low.
Domestic tourism sustaining car rental sales in Brazil. Recent economic variables have impacted tour-
ism activity in opposite ways: positively by a devaluation of the BRL vs. USD (Exhibit 12), stimulating
Source: Ipeadata domestic travel and increasing daily rental; and negatively by an increase in unemployment rates,
consequently driving down domestic disposable income. Additionally, domestic tourism and in-
bound tourists from other Latam countries are expected to sustain sales for the segment
(Euromonitor).
Exhibit 13: Sector Revenue is highly de-
Monthly rentals, replacement and business travelling, are mostly linked to Brazil’s economic perfor-
pendent on economic growth mance (car rental revenue had it lowest nominal growth at 2.5% in 2015, while GDP decreased
0.4% in real terms – Exhibit 13) and account for most of its volumes. ABLA expects an increase of at
least ten times the current number of customers for car rental companies, reflecting little bargain-
ing power over them (Exhibit 15 and Appendix 9). Car rental demand for leisure is correlated with
tourism demand (Exhibit 15), Brazilian total investment and Brazilian GDP (Appendix 9). Among
these demand drivers, we used the volume of listed company CVC passengers on board as a proxy
for Brazilian tourism demand.
Future Trends to Keep an Eye On:
In order to achieve the gold standard, a car-rental company has to be able to efficiently liquidate its
fleet. In the Brazilian auto industry, more than 50% of purchases are financed. For that reason,
credit volume is a determinant variable for car sales in the country. A credit contraction reduces
significantly new car sales volume and benefits the used car market. As we can see in Appendix 9,
almost 65% of the increase in used car sales can be explained by a decrease in volume of credit
Source: ABLA, IBGE available - a substitution effect. Therefore, we expect that as Brazilian GDP recovers it should
3
Exhibit 14: Five Porter Forces
stimulate a credit expansion and impact car rental companies in two opposite ways: improving
companies financial conditions but harming used car sales, on the back of a switching demand from
used cars to new cars.
In this way, we can see that in the last few years used car sales has worked as a catalyst for car rent-
al companies. When the macroeconomic scenario becomes unfavorable, customers substitute new
car purchases for used car ones, and this phenomenon allows car rental companies to be profitable
even under bad economic conditions.
Big sales and big customers, who wins this tug-of-war? Automakers in Brazil are highly concentrated,
with the largest six companies accounting for 77% of the market in 2015 (Exhibit 16). Although car
rental companies are among their largest clients, representing around 14% of car purchases in
2015, they belong to a much more fragmented sector, with 7000+ companies. As a consequence,
only large car rental firms like Localiza are able to enjoy high bargaining power and obtain large
Source: Team C Research discounts in fleet acquisition. As the economic recession deepened and car sales plummeted
26.55% in 2015, all car rental companies were in a better position to negotiate, but we believe the
party is coming to an end.
Exhibit 15: Impact of Tourims in Daily Rental The question is: quality or price? In Car Rental segment, entry-level cars are not so different be-
tween competitors and Localiza is able to stand out for its high quality service. Its customers rated
the company 8.05 out of 10 on Reclame Aqui, Brazil’s leading consumer complaint website, a good
grade when compared to its peers (Appendix 10). In order to provide better services, Localiza in-
vested in programs targeting client retention, such as a loyalty program, social media communica-
tions, the Localiza Way template, Localiza Express stand and a mobile express app (Appendix 2).
Accrediting its position, Localiza was the 25th most valuable brand in Brazil, in 2015, according to
R2: 0.87 Interbrand Consulting (Appendix 16). In this segment, Localiza applies higher daily rents than its
peers, even after having engaged in a recent price reduction (Exhibit 9). In the fleet rental segment,
quality is also more important than price to Localiza’s customers. Therefore, to provide a quality ser-
vice, the company uses technology to enhance its clients’ gains in costs, productivity, sustainability,
and reduce accidents. With this differentiation, Localiza aims to achieve specific clients: customers
Source: CVC, Company data from 2010—2016 that use cars in agreement with its car maintenance policy; in other words, customers that will not
wear its vehicles out so quickly.
Is Movida a huge threat? In 2013, JSL, one of the largest logistics companies in Brazil, acquired
Exhibit 16: OAS Revenues Market share Movida, once a small car rental firm with 2.4th cars on its fleet. JSL began a large expansion plan,
having since injected around BRL 700mm in the company, fueling a one-store-per-week expansion
and increasing its fleet 23x to 55th. They have been adopting a competitive pricing strategy and
appointed Renato Franklin, a highly regarded young executive, with vast experience in the retail
sector, as Movida’s CEO. Furthermore, recent capital increases has been signaling a possible spin-
off move. Although JSL is highly leveraged, with 4.3x Net Debt/EBITDA vs. Localiza’s 1.75x, Movida
itself has low leverage since investments have been made mainly through equity (Exhibit 18). With a
possible successfully IPO move, it would pose a serious threat to Localiza’s market leadership, becom-
ing a highly-capitalized competitor capable of continuing its fast expansion plan.
Can technology propel car rental companies? Car Rental online sales already represent 8% of total
revenues in Brazil, having grown at a 25% CAGR2010-2015. According to a Euromonitor report, this
segment will grow at 6% p.a., reaching BRL 346 million in revenues in 2020. Additionally, when au-
tonomous cars become mainstream, car rental companies, Uber’s and Taxis will converge into a
similar business model, given that the driver’s figure will be extinguished. However, even in this
scenario, we believe car rental firms will have an advantage over companies like Uber, due to their
fleet management know-how.
Source: ABLA Data of 2015 Will adaptation be necessary? A research from MKM Partners LLC showed that 56% of recent Ameri-
can ride-share customers sometimes used Uber as a replacement for traditional car rental services.
Exhibit 17: Consumer Quality Grade The survey results may be explained by the fact that taxis have always been a car rental threat for
short distance travelers. With price reductions caused with the advent of Uber, this alternative has
Consumer Quality become even more advantageous for short-distance travelers. In Brazil, Localiza currently considers
Companies Uber more as an opportunity than a threat to its business, as there is in a partnership program that
Grade allows Uber’s drivers to rent cars from Localiza. Furthermore, renting a car from Localiza is cheaper
Localiza 6% from a 30 km on drive. Localiza’s clients drive an average of 100 km per day, a high distance to com-
Unidas 7% pete with a business model such as Uber (Please refer to Appendix 11).
Hertz 9% The Yankee solution. The opportunity for expansion is so big that Enterprise holdings, the biggest car
Avis 6% rental company in the world, is opening its own car-sharing services. Enterprise sharing promises to
Movida 13% use the company’s enormous fleet and market penetration to deliver better service than its Silicon
Valley competitors. The biggest players in the car-rental world are noticing the potential synergies
Average 5% of integrating ridesharing with their businesses and the rationale lies in the fact that demand
pattern for car rental complements from that of ridesharing. Car sharing is still limited in Brazil, with
Source: ABLA, “Reclame Aqui”, Team C Research only Zazcar, Fleety and Blablacar available. Localiza, however, has not yet signaled to the market
any potential action on this type of business and we think it could be missing the bus (Please refer to
Exhibit 18: Localiza vs Peers Net Debt/ the Appendix 12 for the SWOT analysis).
EBTDA
Investment Summary
We issued a Sell recommendation for Localiza Rent a Car (RENT3) with a YE17 target price of
R$31.00 and a 24% downside from its closing price of R$ 40.80 on October 14, 2016. Localiza has a
history of high growth and profitability and we acknowledge management’s ability to leverage
economies of scale and superior know-how. However, we believe the stock’s current prices have
disconnected from its intrinsic value and do not reflect Localiza’s true potential. Even in our Bull
case scenario, where all the benefits were given to the company, Localiza would not offset our sell
and would, at best, receive a hold recommendation.
What Are the Outcomes of an Economic Recovery in Brazil?
Positives: i) unemployment rates reached 8.5% YE15 and we expect it to decrease by YE17 will
increase business activity level and rebound business travel demand back to past years posi-
Source: Company data, Team C Research tives; ii) boost domestic tourism upwards; (iii) inject back investments in infrastructure pro-
jects in the country, and (iv) decrease inflation from 10.5% YE15 to 8% YE16 and 5.5%
4
Exhibit 19: Localiza vs. Peers
Source: Company data, Team C Research
Exhibit 20: International Peers
Source: Company Data, Team C Estimates
Exhibit 21: Spread Between ROIC and
WACC
Spread
Source: Company Data, Team C Estimates
Exhibit 22: Volume Growth
Source: Company Data
YE17, all driving Localiza’s volume of rental days upwards and presenting an opportunity to
keep posting solid results in all business segments.
Negatives: with new car loans regaining space as disposable income starts to walk again,
OEMs high car inventories will deflate as demand for new cars increases and shifts used car
sales downwards. Additionally, government indications of a cut in interest rates (SELIC)
could potentially hurt Localiza’s used car sales, given the substitution effect between new
autos and used ones. The company will feel the blow as the price spread between a vehi-
cle’s purchase and its eventual sale broadens and thus negatively affects its overall results,
increasing its costs with fleet renewal.
2 plus 2 equals 5. Our negatives outweigh the positive points based on the strength of an
increase in the spread between a car purchase price and its sale. Localiza’s costs increases
proportionally to its depreciation and to compensate this cost increase, its rental revenues
would have to be much larger than current level.
Localiza Stands Out with its Operational Excellence but Intrinsic Value Still Presents Downside to Cur-
rent Stock Price. Even through all of our different approaches to evaluate Localiza’s intrinsic value, the
company still presents downside to its current stock price, implying that the stock is trading at a
large discount to its fair value.
The Easy Money Has Been made. Localiza is currently trading at 21.9x P/E fwd, approximately 2 std.
deviations above its 5-yr historical levels at avg. 18x. Our implied YE17 P/E Fwd is at 15.2x and im-
plies a 31% discount to current levels. We reinforce our constructive perception of Localiza’s opera-
tional excellence and scale power, however we believe additional upside is already priced-in locking
up further value creation. According to our estimates, even if the company returns to its historical
average it still implies a 17.7% downside. Additionally, we do not foresee the company reaching
close to international multiple levels of 13.8x in the medium term, given the uncertainties over
market consolidation in Brazil.
What’s Priced-In? We incorporate in our valuation model a strong volume growth in all of the compa-
ny’s segments, a 4% p.y. average price increase for Car Rental and inflation pass through for Fleet
Rental, a small margin loss due to increased competition, and a stable return. However, we high-
light that after having given all these operational benefits to the company based over historical
performance, the current stock value is still largely detached from its foundation value, which solidi-
fies our sell recommendation.
Future Growth Constrained by Strong Competition. Revenue growth over the recent years has been
primarily driven by strong improvements in volume. This growth in volume is derived from a com-
petitive pricing strategy where Localiza held back prices to beat competitor’s prices. It culminated in
a 14% Y/Y growth in rental days sold in 2Q16. We believe this pricing strategy was the result of a
one-time set of factors that will remain present for the near future, since it takes almost 2 years for
Localiza to increase prices. Furthermore, with competitors such as Movida capable of leveraging
operations and gaining scale, we expect the Car Rental segment to have a more competitive envi-
ronment, potentially limiting future strong growth prospects for Localiza.
End of a Golden Era for Used Car Sales Up-cycle in Brazil. FX appreciation and a contraction in new car
loans were responsible for an increase in new car prices, inflating the demand for used cars in re-
cent years. This increase in demand sustained a depreciation contraction for the company and
drove its overall results upwards: allowing it to sell a portion of its fleet for a price close to its pur-
chase cost and working to fill the gap left by recent rental margin drops. Signs of economic recovery
indicate a possible upturn in the demand for new cars and, therefore, used car sales are expected
to shrink back to historic levels, driving depreciation further upwards. We highlight that, although
depreciation is a non-cash expense, a higher depreciation implies a higher capital expenditure for
Localiza´s fleet renewal, core to the health of its car business cycle.
Might be Time to Pull Off. The Market seems to price-in much more than our DCF-based analysis
suggests, implying a downside of 24%. We further estimated Localiza’s intrinsic value through other
approaches, all supporting our recommendation. In the following section we demonstrate our valu-
ation approach by showing the large detachment from the company’s fair value to its current stock
price.
Financial Analysis:
Localiza at a glance. The financial table below illustrates the historical evolution of Localiza’s indica-
tors moving forward with our 2016e and 2017e estimates. When compared to its peers, the compa-
ny offers higher returns to its stockholders due to better operational performance and scale gains.
Reliable cash flow generation. We expect Localiza to continually generate positive CFO mainly due to
its solid performance in managing and selling vehicles – the exception in 2015 is due to a BRL
200mn reduction in the suppliers line – as seen in Exhibit 24. Besides excellent fleet management,
reliable cash flow generation can also be noticed through working capital management; with an
avg. of ~40 Days Sales Outstanding compared with an avg. of ~280 Days Payable Outstanding be-
tween 2010-15. We avoid assessing Cash Conversion Cycle for the company, due to the specific
nature of the Car Rental’s business, which does not create value with a higher inventory turnover
and, essentially, is not a full final-product sector. Additionally, Localiza has consistently showed its
ability to generate higher CFO than its capital expenditures: CFO/Capex
has been healthy for the past years at avg. 110% between 2013-15 and in a testing future scenario,
we expect maintenance of CFO/Capex ratio, avg. ~100% in 2016-18 (as seen in Exhibit 24).
Operations were at full throttle, but the same cannot be said for prices. Over the past ten years, Lo-
caliza was able to grow Car Rental volumes at a 16.5% CAGR2015-05. As for Fleet Rental, the same
can be said with a 15% increase per year. In this period, the company more than tripled both Fleet
and Car Rental fleet size, reaching 110 thousand vehicles in 2015, compared with 35 thousand in
2005. These incremental increases in volume can be mainly explained by Localiza’s historical prices
policy (Exhibit 25). The company always adjusted its prices below inflation for both segments, but
mainly for Car Rental. This lower than inflation adjustments aided the company to promote a rapid-
ly expansion in volumes, but it became an issue now. Recently, Localiza engaged in a prices war
against its competitors, leading to a holding-back prices scenario.
5
Exhibit 24: CFO/ CAPEX
Gross and net margins remains stable. In the last ten years, gross margins ranged from 35 to 39%. In
2016-2018 we expect it to remain at the same level (37-38%), as most of productivity gains have
already been incorporated in its operations. In the last five years Localiza presented a very stable
margin of 10% and we expect this to continue throughout our projections.

LOCALIZA FINANCIAL ANALYSIS 2012 2013 2014 2015 2016 e 2017 e 2018 e
CASH FLOW STATEMENT SUMMARY (BRL mn)
Cash Flow from Operations 1,815 2,278 2,704 2,044 2,654 2,994 4,015
Cash Flow from Investments -1,645 -2,012 -2,505 -2,332 -2,750 -3,095 -3,498
Source: Team C Estimates Cash Flow from Financing -57 -79 273 190 -77 319 -234
Change in Cash 113 187 472 -98 -172 219 284
Exhibit 25: Prices & Inflation Evolution PROFITABILITY
Gross Margin 39% 37% 36% 36% 36% 35% 35%
EBITDA Margin 28% 26% 25% 24% 24% 23% 23%
Net Margin 8% 11% 11% 10% 10% 8% 9%
RETURN
Return on Assets 6% 7% 7% 6% 6% 5% 6%
Return on Fleet Value 9% 14% 13% 11% 10% 9% 9%
Return on Invested Capital 15% 18% 19% 17% 16% 16% 18%
LIQUIDITY
Current Ratio 1.70x 1.53x 1.47x 1.48x 1.23x 1.31x 1.04x
Adjusted Current Ratio 4.56x 3.77x 2.98x 3.20x 2.88x 2.97x 2.47x
ACTIVITY
Total Asset Turnover 0.78x 0.77x 0.68x 0.64x 0.64x 0.67x 0.67x
Source: Company Data
FINANCIAL LEVERAGE
Exhibit 26: Depreciation per Vehicle Debt to equity 1.55x 1.75x 1.64x 1.56x 1.40x 1.45x 1.29x
Net Debt to EBITDA 1.41x 1.45x 1.27x 1.75x 1.81x 1.82x 1.39x
SHAREHOLDER RATIOS
Basic Earnings per share 1.19 1.81 1.94 1.90 1.97 2.04 2.37
Dividend payout ratio 29% 131% 70% 34% 38% 41% 50%

Note: Our adjusted current ratio takes the company's fleet book value net of depreciation as a liquid asset at a
30% discount.
Source: Company documents, team estimates

Source: Company Data, Team C Estimates
Exhibit 27: EBITDA Margin Convergence
Source: Company Data, Team C Estimates
Exhibit 28: EBITDA Margin Convergence
What should I know about depreciation? Fleet mix in Car Rental is different from Fleet Rental, and in
2015 Localiza paid on average BRL 39 thousand per Fleet Rental vehicle vs. BRL 31 thousand for Car
Rental vehicles. Depreciation expenses for Fleet Rental are larger not only due to this price differ-
ence, but also because their are kept longer in use (Car Rental vehicles are put to sale after around
8 months vs. Fleet Rental 36 months). Not only is mileage greater, but OEMs normally launch new
versions of their cars after 18 months, so cars that are kept beyond that time in the fleet tend to
depreciate a lot more as consumers find their appearance dated. This is why although the differ-
ence in average value per car is only 23%, annual car depreciation expense in Fleet Rental was 530%
larger than in Car Rental in 2015.
EBITDA margin, not a pretty picture. Consolidated EBITDA margin decreased 4p.p since 2012 to
23.8% in 2015, which was partially offset by a consistent improvement in the Used Car segment.
Car's depreciation – which can be understood as the value loss since the car´s acquisition until its
sale – has witnessed a relevant decrease of roughly 85% from 2012 to 2015 (Exhibit 26), aiding the
company to reduce the spread between the prices of the purchased and sold car, and compen-
sating the recent drop in rental margins of 500bps and 330bps (Car and Fleet Rental segments,
respectively) in 2013-2015. Considering an economic recovery, a slow increase of new car loans by
the banks, and an expected lower interest rate, we foresee that a higher depreciation at the 5-yr
average level will take place for Car Rental (~R$ 1,900) and present a EBITDA at a steady 3%
(instead of 7.3% in 2015), for Used Car segment.
Solid financial structure compared with peers. Localiza has a disciplined approach when it comes to
the use of debt. Between 2010-2015, Net Debt/EBITDA hovered near 1.7x vs peers at avg. 3.4x
(Exhibit 18). Localiza’s Current Ratio underestimates its liquidity, since vehicles (bulk of the compa-
ny’s liquid assets) are accounted as non-current assets. For this reason, we estimated Localiza’s
liquidity through and Adjusted Current Ratio¹ which considers the fleet’s book value at a 20% liqui-
dation discount as a current asset, resulting on an adjusted current ratio of 3.20x in 2015. The Debt
expiring in 2016-18 corresponds to ~34% of Localiza’s Current Total Debt and its foreign currency
loans are fully hedged through SWAP contracts. Regardless of a good credit rating, Localiza still
prefers to maintain a comfortable cash position rather than debt financing and we expect that to
continue. Also, we see a track of stabilized long-term Debt/Asset for the past three years at ~0.40x
despite its fleet growing 7% in the same period.
Profitability. In order to assess Localiza’s efficiency against its peers, we analyzed the ROF metric,
which illustrates how much of net income the company generates by one monetary unit invested in
its vehicle fleet. Localiza achieved 11.1% YE15 of ROF², 3.1x higher than the runner-up Movida at
3.7% (Appendix 13), as a result of fleet optimal usage. ROE: Localiza showed a 250bps increase in

Source: Company Data, Team C Estimates Note: ¹Adjusted Current Ratio= {Current operating assets + [Fleet book value x (1-20%)]} / (Current operating liabilities). ²Return Over Fleet= Net income / Fleet
book value.
6
Exhibit 29 Volume Growth ROE in the period of 2012-15 and we foresee a decline of 80bps to 19.9% in 2020 mainly driven by a
slight decrease in Net Profit Margin due competition coupled with a higher Asset/Equity ratio relat-
ed to a lower leverage. Compared with international players, Localiza presents a more reliable cash
flow generation but a lower return on equity in some cases (Exhibit 20), which is mostly explained by
a much larger international competitor’s leverage.

Exhibit 30 ROE Decomposition

Du Pont Analysis 2012 2013 2014 2015 2016e 2017e 2018e 2019e 2020e
Net Profit Margin 8% 11% 11% 10% 10% 8% 9% 10% 10%
Source: Company Data, Team C Estimates Asset Turnover 0.78 x 0.77 x 0.68 x 0.64 x 0.64 x 0.67 x 0.67 x 0.66 x 0.66 x
ROA 6.0% 8.4% 7.2% 6.6% 6.2% 5.7% 5.9% 6.4% 6.5%
Asset / Equity 3.05 3.41 3.44 3.15 3.05 3.09 3.09 3.04 3.05
ROE 18.2% 28.7% 24.8% 20.7% 18.9% 17.5% 18.2% 19.4% Val-
19.9%
Exhibit 31: Spread Between car ue
Source: Team C Estimates enhancement barely breathing? Comparing Local-
Purchased and Sold
iza’s value creation to its peers, we notice increased competition has affected them all in different
proportions. For most of its peers, the more competitive environment acted as a poison to its value
creation potential (Exhibit 21). As a result, we see different levels of impact
in ROIC³ minus WACC⁴ for each company (Exhibit 19). Localiza’s historical positive spread illustrates
its ability to continuously deliver value to its stockholders, even in a tougher environment of high
interest rates and strong competitiveness (~2.9% of spread vs. avg –5.7% peers’ spread in 2015).
Thus, in a long-lasting scenario of holding back prices with bigger pressure over value creation po-
tential, companies will start to increase its prices as they cannot bear such negative spreads for so
long. We believe Localiza will not be able to return to the historical average spread due to a more
competitive scenario, but should pick up again at 5.5% in 2020.

Source: Company Data, Team C Estimates
Exhibit 32 Historical EV/EBITDA
Source: Capital IQ
Exhibit 33 Our numbers vs. consensus
Valuation
We reached our price target of BRL 31.00 using a Discounted Cash Flow Model and validated our
findings through a Trading Multiples Analysis and a Discounted Dividend Model.
DFC Model - Watch out for the bears
We broke down Localiza into four different parts in order to reach a clear estimate of its intrinsic
value: i) Car Rental; ii) Fleet Rental; iii) Used Cars; and iv) Franchising.
CAR RENTAL
We expect Localiza’s Car Rental volume to double in the next 10 years as tourism and business activi-
ties recover following the macro turmoil and the company continues to gain market share. In our
projections we are also incorporating an increased demand for car rental coming from both large
infrastructure projects, that are expected to resume in 2017-2018, and higher tourism demand
which should affect mini-lease segment as some of the fleet leases for infrastructure projects are
done in a monthly basis. Therefore, we expect an additional 30 thousand rental days sold by 2021
and 58 thousand in 2026. Localiza’s car rental fleet should reach around 117 thousand cars in 2021
and 164 thousand in 2026 (Exhibit 28).
Prices per rental day are expected to have a compounded growth of around 4% a year until 2026,
resulting an average revenue per rental day of BRL 126 by 2026 vs. BRL 84 in 2015. Localiza has de-
creased its prices 11% in the last 18 months, in an aggressive strategy to pressure its competitors,
and we expect this tough environment to continue for a while. This approach seems to be working
as the company has gained market share in volumes while pressuring competitors’ margins. Hence,
we believe they will keep adjusting prices below inflation until 2024 as the company has done in the
past. We project that the company will only begin to adjust prices in line with inflation by 2024,
driving its Car Rental’s utilization rate to an stable 71%, compared with ~74% in 2Q16. This incre-
mental drop in utilization rate is mostly explained by a larger fleet of vehicles, which implies a hard-
er fleet management, and the slight increase in prices.
Just as a sanity check, we verify our assumptions by simulating Localiza’s market share in fleet terms
of the Brazilian Car Rental Segment. Localiza’s market share in the car rental segment is currently 23%
of total fleet, which implies the rest of the car rental market has a fleet of approx. 265 thousand
cars. If we assume this group will grow in line with GDP and Localiza would grow as our model, the
company would expand its market share by 10p.p. by 2026, reaching a 33% stake. Good, but not
close to the company’s goal of 50% market share. In our Bull Case scenario, the company should
grow its fleet through a 14.5% pace a year in order to reach 50% of market share in car rental sec-
tor. In order to reach the 50% of market share in this scenario (our Bull Case) in 2026, Localiza must
expand its Car Rental fleet in an intense pace of 14.5% a year.
FLEET RENTAL
Large companies that used to outsource their fleets through rental car companies like Localiza should
come back to business, boosting demand for fleet outsourcing again. Also, the Brazilian Government
announced 34 large infrastructure projects (~US$10bn in investments) related to concession auc-
tions scheduled to 2017-18. This could pull the trigger to other investments, increasing demand for
fleet outsourcing. As a result, we projected volume growth in this segment at around 5.8% CAGR 2016
-2021, and its fleet should reach 61 thousand vehicles by 2021.

Source: Thomson Reuters, Team C Estimates
³Return on Invested Capital = EBIT x (1-T) / Fleet book value.
⁴Weighted Average Cost of Capital = Kd x Wd x (1-T) + Ke x We.
We expect prices per rental day to keep up with inflation in this segment given pass-through clauses
in the contracts. Regarding Fleet Rental utilization rate, we foresee the continuity of the historical
average of ~97%, given that the contracts, which establish the amount of required vehicles, are
settled before Localiza buys the cars to meet its demand and that Localiza already operates at opti-
mal levels in this segment.

7
 Exhibit 34: P/E Multiples Valuation USED CARS AND CAPEX
2017E With an improving macro scenario, sales in the new cars market should pick up again, outpacing de-
mand for Localiza’s Used Cars Segment, consequently pushing depreciation expenses and fleet re-
Category 1 Category 2 newal costs upwards. We expect each Car Rental vehicle will depreciate around BRL 1,200 in 2017
P/E Valuation (vs. BRL 620 in 2015) and each Fleet Rental car should have a higher depreciation at around BRL
Selected Multiple - Median 12,5x 10,0x 4,200 for 2017. As consequence, the average price per car sold will grow at a 2% CAGR2016-2026,
Projected Earnings 433 433 lagging behind the price of cars purchased that should follow the macro scenario and grow a com-
pounded average of 4% between 2015 and 2021. This increase in the price of cars sold vs. cars pur-
Equity Value 5.420 4.335 chased means that Localiza will have to invest almost 2x more to maintain and grow its fleet in
Total Shares 212 212 2017. We expect a BRL 3.1 bn total CAPEX for 2017 vs. BRL 2.3bn in 2015. But as proceeds from car
sales will lag behind fleet investment, net CAPEX per vehicle will grow to BRL 6.6 thousand in 2017
Implied Value per Share 26,00 20,00
vs. BRL 3.5 in 2015.
Source: Bloomberg, Company Data, Team C Esti- Recently OEMs have been struggling to cope with the recession and had to reduce output to ex-
mates tremely low levels. This caused delays in deliveries to car rental companies and Localiza had to post-
Exhibit 35: Localiza’s current Fwd P/E is pone fleet renewal. As it is not optimal to operate an old highly depreciated fleet, Localiza will have
to compensate by slightly increasing fleet renewal in the next year. The fleet renewal ratio should
a +2 standard. deviation event rapidly return to historical levels for both Car and Fleet Rental segments until perpetuity.
Revenues in the Franchise Segment should grow at the same historical pace of 5% a year, but will
+2σ
remain insignificant, representing less than 1% in revenues in 2016.
+1σ Cost of Equity was estimated using both the Global and Traditional method to CAPM model, using a
beta of 0.82 based on a linear regression of the Ibovespa monthly returns vs. RENT3’s monthly re-
turns for the past 60 months and a risk-free rate of 2.50% based on the yield of a U.S Treasury
Bond. We used a 7.00% equity risk premium based on a global survey conducted by IESE Business
School. We also adjusted the risk-free rate though the EMBI+ to reflect Brazil’s sovereign risk and
used a long-term inflation differential to reflect FX risk. Our estimated cost of equity is of 13.6%. We
estimated the company’s 9.85% after-tax cost of debt based on a weighted average of company’s
indexed debt. Using an assumed 34% marginal tax rate and an ideal capital structure of 30.0% Debt
to Total Capital (Market Capitalization avg.), keeping its historical levels, we reached a Weighted
Average Cost Capital of 12.43%. Terminal growth: our DFC model also assumes a 6.59% long term
Source: Bloomberg, Team Research nominal growth rate that takes into account a 2% annual real growth potential for Localiza and a
long term inflation assumption of 4.5%.results.
Exhibit 36: Valuation Football Field VALUATION CHECK
In order to validate our DCF’s results, we estimated Localiza’s price target using a Discounted Divi-
dends Model and a relative approach of Trading Multiples.
We estimated Localiza’s intrinsic value using a Discounted Dividend Model, reaching a fair value of
BRL 31 per share. This approach is relevant given the company’s reliable and consistent cash flow
generation and high dividend payout. Based on our financial statement projections, we assumed a
payout ratio increasing from 38% in 2016 to 70% in perpetuity. We used the company’s cost of
equity (see Exhibit 37) estimated by CAPM of 13.6% to discount the dividends. Our model also as-
sumes the same long term nominal growth rate of the DCF, 6.59%. We obtained an estimated value
per share of R$31 through this methodology, reinforcing our sell recommendation.
Our trading multiples valuation resulted in a price target ranging from BRL20 to BRL26. We selected
comparable companies across the globe (Exhibit 34) and divided them into two groups: i) vehicle
rental companies that have both a capital structure and net margins similar to Localiza’s; and ii)
others that engage in car rental activities with either levels of debt and net margins close to Local-
Source: Bloomberg, Company Data, Team C Esti- iza’s. We calculated their price-to-earnings multiple using consensus estimates for YE16 earnings
mates and selected the median of the resulting sample. Applying the resulting P/E multiples of 12.5x for
group 1 and 10.0x for group 2, we reached an estimate of value per share ranging from BRL20 to
Exhibit 37: Cost of Capital Estimates BRL26 (ExhibitX).
Localiza is currently trading at 21.9x forward P/E , around 2 std. deviations higher than its 5-yr histori-
WACC cal average of 18x (Exhibit 35). This illustrates a downside potential of 17.7% were the stock return to
Risk Free 1.76% its historical average. Additionally, our implied P/E Fwd YE17 is 12.4x, leading to a downside of 45%.
Localiza also seems too expensive when we analyse historical forward EV/EBITDA, currently at 9.8x
Beta 0.8 it is around 3 std deviations higher than its 5-yr average of 8.8x. In all the cases, we see a highly
Equity risk premium 7.0% likelihood of downward future trends for Localiza’s stock, reinforcing our sell recommendation.
Spread Inflation 2.9% We developed a final approach through the Fair/Target Multiple for Price-to-Book (formula in Appen-
EMBI 3.2% dix 19). Given Localiza’s Return on Equity, Growth Rate and Cost of Equity in perpetuity (16.9%;
6.6%; and 13.6%, respectively), we reached a Target P/B of 1.3x, much lower than its current level
Cost of equity 13.6% of ~3.8x. Please, see in the following table that Localiza, ceteris paribus, would have to operate with
After-tax cost of debt 9.3% an ROE of ~21% coupled with a 11% Growth Rate in perpetuity in order to justify its current trading
Debt total capital multiple of 3.8x P/B (Exhibit 38), which is unrealistic. This final approach illustrates Localiza is a falla-
cy in terms of upside potential: time to pull off the highway before “the bear hits the car”.
(Market Cap) 30%
WACC 12.3%
Valuation
Exhibit 38 . Price to Book Fair Multiple Sensitivity
ROE, %
(+) PV of cash flow 1,923
1,3x 5% 9% 13% 17% 21% 25% 29%
(+) PV of terminal value 5,420
1% 0,3x 0,6x 0,9x 1,3x 1,6x 1,9x 2,2x
Total Enterprise Value 7,344 3% 0,2x 0,6x 0,9x 1,3x 1,7x 2,1x 2,4x
Net cash (or debt) 1,634 5% 0,0x 0,5x 0,9x 1,4x 1,9x 2,3x 2,8x
Equity Value 5,710 7% -0,2x 0,3x 0,9x 1,5x 2,0x 2,6x 3,2x
Equity Value YE-17 6,665 9% -0,9x 0,0x 0,8x 1,7x 2,6x 3,5x 4,3x
DCF value/share (BRL) 2016 26.91 11% -2,4x -0,8x 0,7x 2,3x 3,8x 5,4x 6,9x
DCF value/share (BRL) NTM 31.00 g, % 13% -13,7x -6,9x -0,2x 6,6x 13,4x 20,1x 26,9x
Source: CFA material, Team C Estimates
Source: Team C Estimates
8

Exhibit 39 Monte Carlo Simulation
Results
Source: Team C Estimates
Exhibit 40 Actual and Future Market
interest rates
Source: BM&F, Economatica
Sensitivity Analysis – Monte Carlo Simulation
We performed a Monte Carlo analysis in order to simulate the impact of overall changes in key
modelling assumptions on the implied share price and on our 12-month target price. We obtained
assumed a normal distribution for annual inflation and triangular distribution for vehicle deprecia-
tion and fleet investment. The amount of car sales was kept as a dependent variable to fleet size.
We obtained a mean price of BRL 30.22 and around 75% of scenarios indicating a sell recomenda-
tion, confirming out call (Exhibit 39).
Investor question: why are you telling me to sell such a good company? We believe Localiza is the
best car rental firm in Latin America. It is an innovative company with prudent and experienced
management, top of the class service and unmatched scale and capillarity. We reflected all of these
qualities in our projections, estimating that free cash flows to firm will grow at a CAGR of 38% be-
tween 2016 and 2026. But even with such exemplary performance embedded in our model, we see
potential downside in the stock, and thus our sell recommendation..
Investment Risks - How can we be wrong?
Our fair value for Localiza is subject to operational, regulatory, political, and macroeconomic risks
that we fully assess with probabilities and possible impacts to the company in a matrix form and on
a Monte Carlo simulation.
OPERATIONAL RISKS
Operational Risk | Competition to Step Down (OP1). We foresee Localiza’s main competitors (Unidas
and Movida) to continue growing through their pricing and tech invesments strategy, potentially
threatening Localiza’s future market share gains in Car and Fleet Rental. However, if competition
fails to maintain their sources of financing, Localiza could have a chance of capturing their share of
the market.
Impact on Valuation: Decreased levels of competition opens space for Localiza to increase prices in
line with inflation 2018-on, exiting current pricing competition.
Impact on Target Share Price: Very relevant, since an increase in prices throughout our forecasted
period would contribute to the company’s top line growth. In order to change our recommenda-
tion from a sell to a hold, Localiza would have to increase prices with inflation +1% reaching BRL
44/share and further increase 2% inflation for a buy recommendation, reaching BRL 54/share.
Operational Risk |Scale gains through tech initiatives (OP2). Further technological innovations have
the potential to generate higher efficiency gains through its operations, such as intensifying online
and mobile car rentals trend.
Impact on Valuation: Scale gains will further reduce costs and SG&A expenses, boosting its
top line going forward.
CORPORATE GOVERNANCE RISKS
Corporate Governance Risk | Succession Plan (CGR1). Eugenio Mattar, current CEO, and three other
top executives will retire over the next five years. In simple words: Localiza’s management team
knows how to buy and sell the right car. There is an intrinsic know-how over when, which and for
how much to acquire its assets. There is no such thing as a well-developed software to fully acquire
their know-how. Therefore, there can be a variety of uncertainties over the future of its operating
excellence.
MACROECONOMIC RISKS
Macroeconomic Risk | Slower GDP Recovery (MR1). In 2015, Brazilian nominal GDP fell 3.8%, with
political changes it is expected to have a contraction of 3.4% in 2016. The Brazilian recovery de-
pends mostly on fiscal adjustments and if this does not happen, an extension of the crisis could
negatively impact the demand for Localiza’s services.
Impact on Valuation: One of the biggest impacts is on daily rental volume, given that a lower
GDP per capita reduces families spending and level of business activity. This presents nega
tive impacts on Localiza’s Car and Fleet Rental segments.
Impact on Target Share Price: If we promote a 0.5% increase in GDP on each forecasted year,
we should reach a Price Target BRL 44, moving our sell recommendation to hold and we
would have to promote 1% incremental in order to reach a buy recommendation at BRL 57.
Macroeconomic Risk | Rise in Interest Rates (MR2). Increase in interest rates have two conflicting
impacts on Localiza: i) increase in its cost of debt, and (ii) it has historically been attached to new
car purchases. The first one has a negative impact on Localiza’s financial structure. However, given
its already low leverage level, it has its impact reduced. The second one is of great importance for
the company’s operations, once it causes a substitution effect that increases demand for used cars,
and therefore reduces the spread between price of cars purchased and sold.
Impact on Valuation: With an increase in interest rates, the company’s cost of debt would be
driven upwards due to higher costs of financing for fleet renewal. Thus, it would increase
our cost of capital. An increase in the cost of capital would drive the share price down and
further downside levels.
Macroeconomic Risk | Credit contraction impact on operations (MR3). Despite recent signals of a
credit expansion in the country, banks have shared major delinquency levels in the past, which
could lock up prospects of them releasing more cash, boosting Localiza’s results in car sales for a
longer period of time as people should buy more used cars over new ones.
Impact on Valuation: Increase in demand for used cars. Consequently, the company's spread be-
tween a car purchase price and its sale price will narrow.
9
Exhibit 41 Risk matrix POLITICAL RISKS

Political Risk | Subsidies Impacts on operations (PR1). Over the last years, subsidies played a special
role in boosting new cars sales in Brazil through subsidies policies. If this comes to happen again,
used cars segment looses place to new cars demand.
CGR1
Impact on Valuation: A government subsidy is responsible in lowering new car prices. This
decrease in prices lowers the demand for used cars, which harms its economic depreciation,
RR1 RR2 driving it upwards. A higher depreciation lowers used cars prices, hurting Localiza’s sales. As
it happened in the past, a subsidy incentive incremented Localiza’s car depreciation over
MR1 OP2 MR3 54% in 2008 and 52% in 2012.

PR1 MR2 OP1

REGULATORY RISKS

Regulatory Risk | Implementation of Special Tax Regimes (RR1). Teams’ talks with ABLA raised ques-
tions over special tax regimes. According to ABLA, several states are recently implementing special
regimes for tax verification of car rental companies, such as the imposition of licensing in states
where vehicles will be driven. If every state implements this regime, car rental companies could be
Source: Team C Estimates obliged to pay their respective states the proportional IPVA (Tax Over the Property of Automotive
Vehicles), over the amount of days when the vehicle was in another state. We believe this regime
can create “tributary barriers”, reducing capacity of companies from other states to compete
(Appendix 15).
Impact on Valuation: A tax such as the IPVA relates directly to Localiza’s core assets: its car
fleet. Given the company’s ownership of its fleet, an implementation of this tax will thus
increase its costs with tax payments.

Regulatory Risk | Stronger Restrictions on Legislation (RR2). Government legal actions can strongly
affect a company’s operating costs. According to the team’s talks with ABLA and ANAV (National Car
Rental and Fleet Rental Association), they have shared with us how this will be of great relevance to
car rental companies, driving expenses upwards. As an example, Clause 52 of Law 13.146/2015 is
currently under discussion and sets the obligation for car rental companies to offer 5% of total fleet
for handicapped people (Appendix 15).
Impact on Valuation: In such a context, this Clause implies an increase in costs for Localiza, as
fleet renewal becomes more expensive and subjects the company to fines.

OPPORTUNITIES

The future of transportation. E-hailing apps and car sharing firms are transforming the way people
see and use cars as transportation. We are moving from owning a car to sharing a car. As technolo-
gy improves, the increased level of autonomy in cars is expected to shift transportation industry
into a new business model. Analysts, researchers and consulting firms differ about the outcomes:
those with an optimistic view argue that car rental firms do have a place in the future and will be
able to use their vehicle management expertise to lease and maintain large fleets of autonomous
cars for e-hailing app firms like Uber and Lift; those with a negative view believe car rental firms will
be crushed by a combination of OEMs and transportation service firms. Our view is that the future
lies somewhere between these two predictions. Indeed, according to a Nielsen research, Brazilians
are highly likely to share assets from others, which make it easy for companies participating in a
sharing economy to quickly gain market share and scale. Localiza has the scale and skills to secure a
seat in the future, however, opportunities can quickly change into threats if a position is taken too
late.
Exposure: OEMs and tech apps have been developing new car-sharing projects in the country
quickly expanding their fleet. These new mobility projects have been on the spot recently,
causing new initiatives from the auto maker’s side.
Exhibit 42 Historical Prices and News Flow

90 How can we be wrong?

Share issuance for
Approval of Ports Dilma's
80 equity
Act Impeachment Bull case: Localiza grows quickly until it reaches its
compensation
passes aimed 50% market share in 2026. Their volumes
70 Government in the Lower House
Stock split 3:1 grow 12% CAGR2016-2026. They are able to in-
announces 2 nd IPI
60 reduction 7.2% profit drop crease prices above inflation and improve fleet
utilization rates to 74%.
50 New CEO
is announced 40.80 47
Government
40 announces
Bear case: The economic downturn lasts for longer
1 st IPI reduction
31 as the government’s fiscal situation further deteri-
30
orates. Demand grows at a smaller pace and the
20 price competition intensifies as companies dispute
Record R$90mm 16 market share. Localiza’s returns are squeezed.
R$2.7 bn fleet net income for Speculation of
10 Lehman Brothers' investment 4Q13 Enterprise
collapse announced acquiring Unidas
0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
RENT (non adjusted)
Souce: Bloomberg, Team C Estimates
10
Appendix 1: Airports and Off-Airports Locations
Outside the airports, car rental market is completely pulverized. Five larger companies added comprehends only 8% of the mar-
ket, in terms of location. Among biggest companies, Localiza is the market leader with 4% of market share.

Source: Company Data

Inside the airports, Car Rental location is a more concentrated market, Localiza persist in leader position and small companies
have a small market slice.

Source: Company Data

Appendix 2: Technological Improvements

Technological Improvements developed for Car Rental segment:

Localiza’s Solution How it Works

Loyalt y Program Developed in 2000
5.7 Million
Granted Bonus of 1.1 Million
Used Bonus of 301 thousand
Additional Dally sold due to granted bonus

Social Media
Facebook: 73 Thousand followers
Linkedin: 24 Thousand followers
Twitter: 1 Thousand followers
Localiza.com: more than 700 million of unique visitors and
more than 400 million views

Localiza Way
Localiza Way is an additional utensil, besides the basic functions
of a smartphone, has GPS, Wi-Fi, music, can makes calls to the
Customer Service and shows the nearest locations of Localiza’s
services

11
 Technological Improvements developed for Fleet Rental segment:

Localiza’s Solution How it Works

Connected Car A system that produces various items of information to enable

the rented fleet to be used as a competitiveness intelligence
tool: Identify all cars in the fleet, encourage defensive driving
and define routes and visit plans, among others.

Indicators dashboard A support to fleet managers receive information on the fleet,

such as fleet profile, service carried out, accidents and tickets.
Fleet indicators are monitored by a team of expert consultants
who regularly present action plans to resolve the improvement
gaps identified. This effort leads to gains in costs, productivity,
sustainability and a reduction in accidents, among others.

Mobile application The app offers car users services as car maintenance scheduling,
real-time information on mileage, fuel, battery efficiency and car
location, as well alerts if parked cars are moved or suffer im-
pacts.

Source: Team C Research

Appendix 3: Comparing Localiza’s Price Spread with Unidas and Movida

The Price spread was calculated as : average price of cars purchased less average price of car sold . This spread does’t take in
account mix changes and include both segments: Fleet Rental and Car Rental

Spread car purchased vs car sold

2012 2013 2014 2015
Localiza 808 990 2,264 3,177
Unidas 5,400 8,200 7,500 8,900
Movida NA NA 10,059 8,746

Source: Team C estimates

Appendix 4: Guaranteed Depreciation Program in US

Guaranteed Depreciation Program is a repurchase agreement between automakers and car rental companies. The contract
between companies determines a set monthly depreciated and the time period to return the vehicle.
For manufactures this program is important because: guarantee a minimum level of production and introduce their vehicles to poten-
tial customers. Additionally, the returned vehicles provide a source of clean, low-mileage used cars for their dealers.
The repurchase price is given by vehicle price less the determined depreciation and, sometimes, an adjustment for damage and excess
mileage.
For car rental companies, the repurchase program provides lower risk to its business. Used car market requires a sophisticated
expertise and can be fickle, adding more volatility on car rental companies 'result. In addition, there are short periods programs, with
witch car rental companies can complete its fleet in a seasonal demand increase. Car rental companies can even explore new market by
testing different car models, without increasing its risk.
Repurchase program also makes sense on vehicles that depreciate quickly, such as vans and luxury cars; witch is not optimal to
buy new cars. In that way, implement a guaranteed depreciation program increase the feasibility of this others possible segments.
While in the US, a large portion of car rental vehicles are repurchased, in Brazil is not a market practice. Repurchase programs may not
be the best solution if the car rental company has an efficient infrastructure to sell its cars. In this case, the car rental company needs a
team to maximize its profits on vehicle sale.
Source: US Companies, Team C Research

12
Appendix 5: Social and Environmental Polices
Social Programs
In 2015, Localiza has invested a total amount of R$ 3 million in social programs. A big portion of it was supported by some Bra-
zilian tax incentive law as: Rouanet Law; Sports Incentive Law; Law in support of elderly people; disable and cancer treatment; Social fund
for children and adolescent.
Sustainability
75% of Localiza’s fleet are classified as more efficient or with lower emission of pollutants. Localiza has a dry cleaning system to
clean cars that reduces the consumption of: water and energy Inside the company, Localiza utilizes smart elevators, building automation
systems, efficient lighting and smart air-conditioning system. All of that reduces energy consumption. As others environmental friendly
solutions, Localiza has: Silver medal for Environmental Responsibility from Ecovadis for the social, environmental, ethical and supply chain
spheres; Localiza Developed an Environmental Management Plan, to adequate its operations to international standards; Promote online
courses which teaches the way to drive to minimize car pollution.
Source: Team C Research

Appendix 6: Localiza’s Board of Directors

José Salim Mattar, From office boy to CEO of largest car Rental Company in Latin America.
Localiza’s Founder is considered visionary and audacious for having invested when no one
believed in the business success. In the second oil shock in 1979 he decides to open new
stores in a context of uncertainly in global markets. Winner of Libertas prize in 2008 from
business studies institution (IEE) for his valorization of economic market principles and
democratic values.

Antônio Cláudio Brandão Rezende, a life dedicated to Localiza

Vice president member of Localiza’s Board of Directors He was one of Localiza’s founding
partners since 1973. Antônio Cláudio B. Rezende has been Localiza’s Executive Vice-
President from 1995 to July, 2008.

Eugênio Mattar, Coached by his Older Brother and great dedication

Eugênio Mattar started at Localiza even before finishing the degree in civil engineering. He
is one of founding partners of the company and is a member of the Board since May,
2013.

Flávio Brandão Resende, The man behind Fleet Rental and all Franchises
Mr. Flavio Resende is one of founding partners of the company and has been a member of
our Board of Directors since March 8, 2005. He served as a Vice President of Total Fleet
and Localiza Franchising S.A from 1995 to 2005.

Letícia Costa, Independent Member

Leticia was Vice- President of Booz and Company’s (current Strategy&) from 2001 to 2010.
She is board member of: Localiza, technip and Marcopolo. Member of Votorantim Audit
Committee and strategy Bematech committee.

José Galló, Independent Member

Member of the Board of Director and CEO of lojas Renner. José Galló has ranked as one of
the top ten Brazilian retailers

Oscar Bernardes, Independent Member

Oscar Bernardes was the owner, president and director of LID- Latin America Internet
Development Group. He is a boarder member of Suzano, Satipel, Alpargatas, Delphi Cor-
poration and Johnson Eletric committees

Stefano Bonfiglio, Independent Member

Stefano Bonfiglio has been a Board member since 1997. He worked at Bankers Trust Com-
pany, Lufkin & janrette and currently is a founding partner of string Square Capital
Partners, based in London

13
Appendix 7: Brazilian Interest Rates
Nominal interest rates in Brazil are among the highest in the world. Comparing with developing countries, Brazilian interest rate
is more than 2X higher than Russia, second biggest rate.

Source: World Bank Data, Dez 2015

Appendix 8 : Porter’s Five Forces Analysis—Car Rental Segment

(i) Threat of New Entrants (HIGH):

 According to ABLA, between 2010 and 2015, the number of car rental companies in Brazil
increased 271.26%. This sector has kept a historical average of annual growth above 10% for
more than a decade. The initial capital required to open a small-sized car rental company is
relatively low, since the market is highly fragmented, with independent entrepreneurs ac-
counting for 50.3% of the market share, in 2015.

 However, Localiza has a strong know-how in all its business segments, hence provi-
ding competitors a low range of ways in which to reach its scale gains.

(ii) Competition in the Industry (HIGH):

 In Brazil, the car rental segment is highly competitive due to lack of service differentiation and large number of competitors of simi-
lar size (in 2015, there were 7,455 rental companies).

 Given this is a market with low entry barrier and a high level of details and peculiarities (such as high tax burden, bureaucracies,
expensive vehicles and low daily rent compared to countries like France, USA and Argentina), many businesses do not survive.
However, those who remain are able to improve over the years, developing technical and quality standards, which has guaranteed
them a greater chance of success given the difficulties that the activity requires.

(iii) Bargaining Power of Suppliers (High):

 In Brazil, the car rental segment is highly competitive due to lack of service differentiation and large number of competitors of simi-
lar size (in 2015, there were 7,455 rental companies).

 Given this is a market with low entry barrier and a high level of details and peculiarities (such as high tax burden, bureaucracies,
expensive vehicles and low daily rent compared to countries like France, USA and Argentina), many businesses do not survive.
However, those who remain are able to improve over the years, developing technical and quality standards, which has guaranteed
them a greater chance of success given the difficulties that the activity requires.

(iv) Bargaining Power of Customers (Low):

 In the car rental segment, the customer generally does not bargain. They are price takers, but they analyze and compare prices in
the market, before deciding where to rent a car. The quality demanded by consumers regarding the service itself is not very high,
having a certain pattern between companies. However, other facilities (such as the possibility of registrations, bookings and price
14
 estimate via website) are improvements that tend to increase the demand for locations. The cost for customer to exchange compa-
nies is low. Therefore, some companies use the loyalty program as a customer retention tool, creating a cost for clients who decide
to switch car rental company, which will be the loss of accumulated benefits. rent a car, such as schedules and destinations flexibili-
ties.

(v) Threat of Substitute Products (Low):

 In the car rental segment, there is not a great threat of a substitute product. We assessed that when the costumer needs to travel
short distances, taxis and Uber are more feasible in some cases. However, when the client needs to travel long distances, the convenien-
ce of having a rental car and its price are more attractive. Another option for those who want to travel long distances is to travel by bus.
Despite offering the comfort of not having to drive, it does not offer many other amenities that the costumer rates important
when renting a car, such as schedules and destinations flexibilities.

Appendix 9: Car Rental Demand Drivers: Some Theoretical Basis

In order to deeper into the car rental market comprehension, we studied the effect of: (i) Number of CVC’s Passengers on Board (PB);
(ii) Total investment expending, and (Inv); (iii) Brazilian Gross Domestic Product (GDP)

Using the software Stata, an econometric tool, we made an estimative of the effect of these three variables on the determination of
Localiza’s dally rent. We use quarter data from jan.2010 to jun.2016. We used the number of passengers on board from CVC (one of
the largest Brazilian travel agency) as a proxy for Brazilian tourism demand. The obtained results are described below:

Rental days = 34.95PB + 0.328Inv + 0,15GDP

As we can see in the exhibits , the estimated model is statically significant with a R-Squared of 0.847

Source: Team C Research

15
Appendix 10: Reclame Aqui (Localiza vs. Peers)

Consumer’s
Opinion Utilization (%) Car Value Loss

Localiza 8.05 66.1% 8%*

Unidas 8.17 49.9% 28%*

Hertz 4.76 62% N/A

Avis 3.82 55.8% N/A

Movida 6.39 N/A N/A

Source: **ABLA, “Reclame Aqui”

Appendix 11: Localiza Vs Uber and Taxi

The table above compare Localiza’s tariff with others transportation alternatives:

Source: Team C Estimates

Localiza is the cheapest option for long distances, for more than 30Km Localiza has the lowest tariff. Comparing with taxi, both haven’t
a price per minute and its prices became equal for a distance of 14, 11 Km; more than that the higher fixed cost from Localiza became
sufficient diluted.

Prices calculations: Fixed Price Price per Km Price per Min.

Localiza R$ 33.99 0.46 + 0.197 (Gas)** R$ 0.00
Taxi R$ 4.50 R$ 2.75 R$ 0.00*
Uber R$ 2.00 R$ 1.50 R$ 0.26
Source: Team C Estimates

*taxi has an additional tariff of R$33.00 per hour stopped (in traffic or waiting for the client)

** considering a gas consumption of 16Km/L and a gasoline price of R$ 3,147

16
Appendix 12: SWOT Analysis

Source: Team C Estimates

Appendix 13: Localiza’s ROF and ROE

Source:: Team C Estimates , Company Data

17
Appendix 14: Competitors Description

Present in the market since 2006, Movida Aluguel de Carros is a young brand
that came to offer innovative solutions in the car rental category. The con-
stant quest for excellence in quality, coupled with cost benefit, has led
Movida Aluguel de Carros to occupy a prominent position in the Brazilian
market. Movida Aluguel de Carros is now a modern rental agency, aligned
with the latest technological trends, that invests in a human relationship with
the client and is ready to provide benefits such as 27-Hour Daily Rate, per-
sonalized services for companies, GPS; 24-Hour Assistance in all of Brazil,

Source: Team C Research

Founded in 1985, Unidas is a company specialized in solutions on rentals

and management of vehicles and fleets. Spreaded all over Brazil the com-
pany relies in more than 30,000 vehicles of several makers to fullfill the
needs of more than 300,000 clients in the country. Its shareholders are
Principal – Gestão de Activos e Consultoria Administrativa e Financeira S.A,
and Fundos de Investimento Gávea, Kinea e Vinci Partners, whose finan-
cial and management skills are widely recognized and shares the company
capital since July 2011 and from then, along with Principal, runs its admin-
istration. The company has three strategical and complementary business
unities: Outsourcing fleets, Car rentals and Used car sales.

Source: Team C Research

Founded in 1993, Companhia de Locação das Américas is a fleet out-

sourcing company and used cars reseller, with its headquarters located
in Belo Horizonte (MG). Its current CEO is named Luis Fernando Porto.
The company currently has 30 branches spread across Brazil and an out-
sourced fleet of over 30,000 vehicles, serving more than 350 clients
from various industries. Each vehicle undergoes regular preventive
maintenance and offers service 24 hours a day, 7 days a week. In April
2012, Locamerica became a publicly traded company, by entering the
Novo Mercado BM F Bovespa.

Source: Team C Research

18
 The company’s history began in 1973, when Transportadora e Cerealista Ouro
Verde was founded in Ponta Grossa, Paraná, and served major companies
from different industries. Two years later, the company began to offer vehicle
rental services, which was boosted by the construction of the Itaipu Hydroe-
lectric Power Plant. In 1985, its head office moved to Curitiba and business
expanded nationwide. In the 1990s, Ouro Verde began to rent heavy machin-
ery and, in 1994, industrial cargo which was increasing enabled the company
to create an international subsidiary in Buenos Aires, Argentina. In the early
2000s, Ouro Verde made large investments to upgrade and increase our light
vehicle and heavy machinery fleets. After a great period of stability and
growth, Ouro Verde adopted a new corporate governance model, modernizing
management within the company. In 2011, Ouro Verde began to exclusively
focus on vehicle and equipment rentals and provision of services.

Source: Team C Research

Founded in 1918, the Hertz Corporation, a subsidiary of Hertz Global

Holdings Inc., is an American car rental company with international
locations in 160 countries worldwide, and a fleet of over 700,000 vehi-
cles. The company is considered the largest private world’s car buyer,
in addition to being the world leader in car rental. For this reason,
Hertz Rent a Car has the tradition, the quality and the prestige that a
company needs to (through the corporate services such as Fleet Out-
sourcing Program) become increasingly competitive. In Brazil, Hertz
resumed its activities in 1995 through the company Hertz Brazil.

Source: Team C Research

Founded in 1948, Avis is an American car rental company headquartered in

Parsippany-Troy Hills, New Jersey, United States. Avis, Budget Rent a Car and
Budget Truck Rental are all units of Avis Budget Group. Avis Budget Group is
present worldwide with more than 10,000 stores, to facilitate car rentals in
over 175 countries. Avis is the group’s brand with the largest representation in
more than 165 countries and 5,450 locations. In Brazil, Avis is defining a path to
ensure the customer an increasingly customized and enjoyable experience,
making every moment enjoyable to the fullest. In 1974, Avis arrived in the
country and began to accumulate years of road in Brazil. Since 2015 is part of
the Avis Group Brudget group, bringing knowledge to translate into the best

Source: Team C Research

19
Appendix 15: Tax Paid by a Car Rental Company
Law No. 13,146 / 2015, the “Brazilian Law for
the Inclusion of Handicapped People”
Summary Statement 492
Clause 21 of the Brazilian Traffic Code
PIS/COFINS Legislation
ICMS on interstate sales
IPVA for car rental companies
Source: Team C Research
The rental industry suffered impact from the clause 52 of this
law, which sets the obligation of offering 5% of adapted vehicles
of the total fleet, an excessive percentage settled with no tech-
nical study or society consultation
The Summary Statement 492 for decades has been affecting the
vehicle rental companies by making them responsible without
legal prevision by the damage reparation to third parts by
renters using the rented vehicles.
In 2016, the Brazilian Supreme Court interpreted that, according
to this clause, the National Department of Transport Infrastruc-
ture (DNIT) has the authority to impose fines for speeding on
federal highways. Until then, only the Federal Highway Police
possessed such jurisdiction.
In 2015, the Law 12.973/2014 altered the legislation of PIS/
COFINS to broaden the concept of “invoicing” and to include in it
“the income of the activity or main object of the legal person”,
also in the presumed profit regime. This way, the car rental com-
panies started being imposed taxes by PIS/COFINS, regardless of
their fiscal examination
regime.
In 2015, the Constitutional Amendment 87 was approved,
changing the ICMS regime for interstate sales with the aim of
balancing the tax income of internet sales and balancing the dis-
tribution of tax income among buyer and seller States. Under the
speech of isonomy, the EC 87/15 embedded significant tax raise
for interstate purchases which can potentially increase in up to
6% the cost vehicle acquisitions by the rental companies. How-
ever, the previous ICMS regime in Direct Sales was kept in force
(ICMS 51/2000 Convention).
In 2015, regarding the IPVA, more States imposed licensing in
the State where the vehicle will be driven. These measures cre-
ate “tributary barriers”, which artificially reduce the competition
capacity of companies from other states and, graver, has the
potential to provoke chaos in the rental industry: all companies
could be obliged to keep the updated register where their vehi-
cles are driven to pay to the respective States the proportional
IPVA regarding the days when the vehicle was in another place.
20
Appendix 16: Interbrands

Localiza was recognized as the 25th most valuable brand in Brazil in 2015 by the Branding Consulting Company Interbrand. According to
Interbrands, Localiza is valued at BRL 350 mn. The company’s innovations in new mobile solutions and its Loyalty program were the main
valuable steps it had given to keep its good management practices and its search for differentiated solutions.

Source: Team C Research

21
Appendix 17: WACC Estimation

As our recommendation is solely based on valuation and not on our judgement of Localiza`s management,
we believe a detailed description of our valuation model is crucial to understanding our investment thesis.
Below he highight the main assumptions and techniques we`ve used.

Global Investor WACC Estimation

Variable Value Description
Based on the yield of a 10 year US government
Risk Free Rate 1.76% Treasury bond
Based on a yearly survey conducted by resear-
Market Risk Premium 7% ches at IESE Business School

0.82 Based on a linear regression of RENT3`s monthly

Beta returns vs. IBOV`s returns for the past 60 months
3.15% Adjustment to the risk-free rate to reflect emer-
EMBI+ ging market's sovereign risk
Long-term inflation Based on the targeted inflation levels for the U.S.
differential
2.45% and Brazil used to reflect FX risk.
Cost of Equity 13.6% Estimated through the CAPM model
Marginal Tax Rate 34% Based on the Brazilian Tax Code
After-tax Cost of Debt 9.25% Team estimate
Estimated as constante taking into account the
Debt/ Market Value 30% market value of the Equity portion
WACC 12.4% Team estimate | WACC = (1-t)*kD*wD + kE*wE

Traditional WACC Estimation

Variable Value Description
Based on the yield of a 10 year Brazilian gover-
Risk Free Rate nment Treasury bond (NTN-F 2026)
11.44%
Based on a yearly survey conducted by resear-
Market Risk Premium ches at IESE Business School
7%
Based on a linear regression of RENT3`s mon-
Beta thly returns vs. IBOV`s returns for the past 60
0.82 months
Cost of Equity 17.15% Estimated through the CAPM model
Marginal Tax Rate 34% Based on the Brazilian Tax Code
After-tax Cost of Debt 9.25% Team estimate
Estimated as constante taking into account the
Capital Structure 30% market value of the Equity portion
Team estimate | WACC = (1-t)*kD*wD +
WACC 14.8% kE*wE

22
Appendix 18: Debt Repayment Schedule and Interest Rates

DEBT REPAYMENT SCHEDULE AND INTEREST RATES

Debt Schedule Interest rate description 2015 2016 2017 2018 2019 2020 2021 Total
Debentures 6th Issuance CDI + 1.07% p.a. 308 30 30 120 120 0 300
Debentures 7th Issuance 113.6% of CDI 516 75 75 75 75 100 100 500
Debentures 8th Issuance 110.9% of CDI 520 0 0 0 250 250 500
Debentures 9th Issuance 111.7% of CDI 509 0 0 0 50 150 300 500
CCBI – New headquarters 98.8% CDI 0 0 0 0 47.5 95 47.5 190
Foreign currency loan with SWAP 102.7% of CDI 273 0 225 0 0 0 225
Working capital/others Equivalent to CDI+ 0.6% p.a. 892 250.3 102.9 51.2 77 75 125 681
Interest accrued and paid on
0 77
12/31/2015
Total 3,019 355.3 432.9 246.2 619.5 670 572.5 2973.7

Estimated CDI for the period 14% 14% 14% 13% 12% 12% 12% 13%
ESTIMATED COST OF DEBT
Debentures 6th Issuance 15.07% 15.07% 13.84% 13.36% 13.27% 13.24%
Debentures 7th Issuance 15.90% 15.90% 14.51% 13.96% 13.86% 13.83%
Debentures 8th Issuance 15.53% 15.53% 14.16% 13.63% 13.53% 13.50%
Debentures 9th Issuance 15.64% 15.64% 14.26% 13.73% 13.63% 13.59%
CCBI – New headquarters 13.83% 13.83% 12.62% 12.14% 12.05% 12.02%
Foreign currency loan with SWAP 14.38% 14.38% 13.11% 12.62% 12.53% 12.50%
Working capital/others 14.60% 14.60% 13.37% 12.89% 12.80% 12.77%

Cost of Debt as % of CDI 108.5% 108.5% 108.7% 108.8% 108.8% 108.8% 108.6%

23
Appendix 19: Sensibility Analysis

WACC, %
PT 9.4% 10.4% 11.4% 12.4% 13.4% 14.4% 15.4%
0.6% 27.0 22.0 18.0 15.0 12.0 10.0 8.0
2.6% 35.0 28.0 23.0 18.0 15.0 12.0 10.0
4.6% 49.0 37.0 29.0 23.0 18.0 15.0 12.0
6.6% 84.0 57.0 41.0 31.0 24.0 19.0 15.0
8.6% 284.0 118.0 70.0 47.0 34.0 26.0 20.0
10.6% 0.0 0.0 239.0 99.0 59.0 39.0 28.0
g, % 12.6% 0.0 0.0 0.0 0.0 202.0 84.0 49.0
Source: Team C Estimates

Car Rental Depreciation, CAGR2016-26 %

PT 3.9% 6.9% 6.9% 9.9% 12.9% 14.9% 16.9%
3.6% 21.0 20.0 20.0 19.0 17.0 16.0 15.0
4.6% 24.0 23.0 23.0 21.0 20.0 18.0 17.0
5.6% 27.0 26.0 26.0 25.0 23.0 21.0 20.0
6.6% 32.0 31.0 31.0 29.0 27.0 25.0 23.0
7.6% 39.0 37.0 37.0 35.0 33.0 31.0 28.0
8.6% 49.0 47.0 47.0 44.0 41.0 39.0 36.0
g, % 9.6% 66.0 63.0 63.0 60.0 56.0 53.0 49.0
Source: Team C Estimates

Fair multiple formula (Price-to-book)

24
Appendix 20: Peers Financial Tables

Financial Analysis, comparables 2012 2013 2014 2015

Localiza
Net Revenue 3,167 3,506 3,892 3,928
EBITDA 876 917 970 935
EBITDA margin 27.7% 26.1% 24.9% 23.8%
Net Income 241 357 411 402
Net margin 7.6% 10.2% 10.5% 10.2%
Equity 1,325 1,341 1,656 1,942
Fleet Value 2,534 2,781 3,278 3,611
ROE 18.2% 26.8% 27.4% 22.4%
Return on fleet 9.5% 13.4% 13.6% 11.7%
Debt 2,055 2,344 2,713 3,019
Leverage (D/E) 1.55 x 1.75 x 1.64 x 1.56 x
Debt to Fleet Value 1.23 x 1.19 x 1.21 x 1.20 x
Cash 824 1,011 1,390 1,385
Net Debt 1,231 1,333 1,322 1,634
Net Debt/EBITDA 1.41 x 1.45 x 1.36 x 1.75 x
ROF 9.5% 12.8% 12.5% 11.1%

Unidas 2012 2013 2014 2015 Financial Analysis,

comparables 2012 2013 2014 2015
Net Revenue 671 827 1001 1125
Locamerica
EBITDA 205 285 333 345
Net Revenue 541 444 629 708
EBITDA margin 30.6% 34.5% 33.3% 30.7%
EBITDA 163 154 201 223
Net Income 79 61 48 43
EBITDA margin 30.1% 34.6% 31.9% 31.5%
Net margin 11.7% 7.4% 4.8% 3.8%
Net Income 4 16 25 19
Equity 613 676 725 749
Net margin 0.7% 3.7% 3.9% 2.6%
Fleet Value 721 915 1,141 1,155
Equity 302 304 308 1,549
ROE 12.8% 9.5% 6.9% 5.8%
Return on fleet 10.9% 7.5% 4.7% 3.7% Fleet Value 695 734 891 999
ROE 1.2% 5.4% 8.1% 2.0%
Debt 581 894 810 918
Return on fleet 0.5% 2.3% 3.1% 2.0%
Leverage (D/E) 0.95 x 1.32 x 1.12 x 1.23 x Source: Team C Estimates
Debt to Fleet Value 1.24 x 1.02 x 1.41 x 1.26 x Debt 681 700 878 926
Leverage (D/E) 2.26 x 2.30 x 2.85 x 0.60 x
Cash 219 211 34 100
Debt to Fleet Va- 1.02 x 1.05 x 1.01 x 1.08 x
Net Debt 362 683 776 818
Net Debt/EBITDA 1.77 x 2.40 x 2.33 x 2.37 x Cash 92 125 167 122

Net Debt 589 575 711 805

Net Debt/EBITDA 3.62 x 3.74 x 3.54 x 3.61 x
ROF 10.9% 6.7% 4.2% 3.7% ROF 0.5% 2.2% 2.8% 1.9%

Source: Team C Estimates

25
 Movida 2014 2015 Europcar (EUR mn) 2014 2015
Net Revenue 168 455 Net Revenue 1,979 2,142
EBITDA 151 244 EBITDA 695 766
EBITDA margin 89.6% 53.7% EBITDA margin 35.1% 35.8%
Net Income 5 67 Net Income - 56 - 112
Net margin 2.8% 14.7% Net margin -2.8% -5.2%
Equity 1,208 1,306 Equity 158 562
Fleet Value 1,016 1,582 Fleet Value 1,403 1,665
ROE 0.4% 5.3% ROE -35.3% -31.0%
Return on fleet 0.5% 5.2% Return on fleet -4.0% -7.3%
Debt 35 537 Debt 3,374 3,300
Leverage (D/E) 0.03 x 0.41 x Leverage (D/E) 21.34 x 5.87 x
Debt to Fleet Value 28.97 x 2.95 x Debt to Fleet Value 0.42 x 0.50 x
Cash 16 461 Cash 226 243
Net Debt 20 76 Net Debt 3,148 3,057
Net Debt/EBITDA 0.13 x 0.31 x Net Debt/EBITDA 4.53 x 3.99 x
ROF 0.5% 4.2% ROF -4.0% -6.7%

Appendix 21: Organization Chart

Source: Team C Research

27
Appendix 22 Balance Sheet and Income Statement

LOCALIZA - BALANCE SHEET

R$ MILLIONS 2014 2015 2016E 2017E 2018E 2019E

Cash and equivalents 1,483 1,385 1,213 1,432 1,716 1,755

Accounts receivable 460 486 573 608 593 612
Other current assets 113 134 187 182 156 170
Total Current Assets 2,055 2,006 1,973 2,222 2,464 2,537

Escrow deposits 42 53 54 54 54 54
Deferred Income and Social Contribuition 33 0 0 0 0 0
Other Long Term Assets 3 50 5 5 5 5
Long Term Assets 78 103 60 60 60 60

Goodwill 82 89 85 85 85 85
Net PP&E 3,482 3,925 4,616 5,257 5,916 6,775
Total Fixed Assets 3,564 4,014 4,701 5,342 6,001 6,860

Total Assets 5,698 6,123 6,734 7,624 8,525 9,457

Short-Term Debt 301 422 417 371 411 590

Suppliers Payable 828 691 802 869 879 971
Taxes Payable 41 28 111 147 202 216
Dividends Payable 59 29 31 31 31 31
Other Current Liabilities 169 186 242 278 846 869
Total Current Liabilities 1,398 1,356 1,604 1,696 2,369 2,677

Long Term Debt 2,412 2,597 2,675 3,211 3,154 3,427

Provisions 70 68 69 69 69 69
Other Long Term Liabilities 162 160 177 177 177 177
Total Long Term Liabilities 2,644 2,825 2,921 3,457 3,400 3,673

Capital Stock 977 977 977 977 977 977

Retained Earnings 679 965 1,232 1,495 1,780 2,130
Shareholders' Equity 1,656 1,942 2,208 2,471 2,756 3,107

Total Liabilities + Shareholders' Equity 5,698 6,123 6,734 7,624 8,525 9,457

LOCALIZA - INCOME STATEMENT

R$ MILLIONS 2014 2015 2016E 2017E 2018E 2019E

Total net revenues 3,892 3,928 4,326 5,142 5,695 6,206

Costs -2,481 -2,499 -2,762 -3,321 -3,681 -3,950
Gross Profit 1,412 1,429 1,564 1,821 2,013 2,257

Operational Expenses -442 -494 -525 -639 -686 -744

Depreciation and Amortization -243 -199 -236 -293 -343 -385
EBIT 727 736 804 890 984 1,128

Financial Revenues 125 170 178 148 177 195

Financial Expenses -276 -372 -434 -468 -501 -531
EBT 576 533 548 570 660 791

Taxes -165 -130 -131 -137 -158 -190

Net Income 411 403 417 433 501 601

EBITDA 970 935 1,039 1,183 1,327 1,513

Gross Margin 36% 36% 36% 35% 35% 36%

EBITDA Margin 25% 24% 24% 23% 23% 24%
EBIT Margin 19% 19% 19% 17% 17% 18%
Net margin (%) 11% 10% 10% 8% 9% 10%

Source: Company data and Team C Research

28
Appendix 23: DCF Analysis and Multiples Valuation

LOCALIZA - CASH FLOW STATEMENT

R$ MILLIONS 2014 2015 2016E 2017E 2018E 2019E

Net Income 411 403 417 433 501 601

Depreciation and amortization 243 199 236 293 343 385
Change in Working Capital 306 -212 113 108 675 96
Other non-cash items 1,744 1,654 1,888 2,161 2,496 2,628
Total Cash Flow from Operations 2,704 2,044 2,654 2,994 4,015 3,710

Capital Expenditures for Growth -113 7 -379 -401 -329 -470

Capital Expenditures for Maintenance -2,392 -2,339 -2,371 -2,694 -3,169 -3,401
Total Cash Flow from Investment -2,505 -2,332 -2,750 -3,095 -3,498 -3,872

Change in Long Term Debt 344 185 78 536 -57 273

Change in Short Term Debt 26 122 -5 -47 40 179
Changes in Equity 174 23 1 0 0 0
Dividends paid -270 -139 -151 -170 -216 -251
Total Cash Flow from Financing 273 190 -77 319 -234 201

Total Free Cash Flow to Equity 472 -98 -172 219 284 39

Cash Position Beggining of Period 1,011 1,483 1,385 1,213 1,432 1,716
Cash Position End of Period 1,483 1,385 1,213 1,432 1,716 1,755

P/E EV/EBITDA Debt to Net

Companies Country Market Cap Currency 2016E 2017E 2016E 2017E Equity Margin
Vehicle Rental Companies
Sixt Germany 2,185 EUR 16.6x 14.7x 6.2x 5.7x 1.7x 5.3%
Ryder System US 3,526 USD 11.0x 10.4x 5.1x 4.7x 2.8x 4.6%
Average 2,856 13.8x 12.5x 5.7x 5.2x 2.3x 0
Median 2,856 13.8x 12.5x 5.7x 5.2x 2.3x 0
Other Companies
Hertz US 2,970 USD 11.7x 8.2x 19.4x 16.0x 7.9x 2.6%
JSL Brazil 2,318 BRL NM 17.7x 6.4x 5.5x 6.2x 0.8%
Locamerica Brazil 345 BRL 13.9x 10.0x 3.9x 3.6x 2.8x 2.6%
Avis US 2,930 USD 10.5x 9.7x 20.0x 19.1x 28.1x 3.7%
Europcar France 1,233 EUR 11.0x 10.3x 11.0x 10.7x 3.7x -2.6%
Average 1,959 11.8x 11.2x 12.2x 11.0x 9.7x 0
Median 2,318 11.4x 10.0x 11.0x 10.7x 6.2x 0
Localiza Brazil 8,705 BRL 22.2x 20.5x 10.2x 9.7x 1.6x 10.2%

Source: Company data and Team C Research

Disclosures:
Ownership and material conflicts of interest:
The author(s), or a member of their household, of this report does not hold a financial interest in the securities of this company.
The author(s), or a member of their household, of this report does not know of the existence of any conflicts of interest that might bias the con-
tent or publication of this report.
Receipt of compensation:
Compensation of the author(s) of this report is not based on investment banking revenue.
Position as a officer or director:
The author(s), or a member of their household, does not serve as an officer, director or advisory board member of the subject company.
Market making:
The author(s) does not act as a market maker in the subject company’s securities.
Disclaimer:
The information set forth herein has been obtained or derived from sources generally available to the public and believed by the author(s) to be
reliable, but the author(s) does not make any representation or warranty, express or implied, as to its accuracy or completeness. The information
is not intended to be used as the basis of any investment decisions by any person or entity. This information does not constitute investment ad-
vice, nor is it an offer or a solicitation of an offer to buy or sell any security. This report should not be considered to be a recommendation by any
individual affiliated with CFA Society Brazil, CFA Institute or the CFA Institute Research Challenge with regard to this company’s stock.

CFA Institute Research Challenge