LATAM TRANSPORTATION & CAPITAL GOODS JUNE 2016 - PREVI
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Global Research June 20, 2016 LatAm Transportation & Capital Goods June 2016 Rogerio Araujo Analyst Tel: +55 11 3513 6595 Rogerio.araujo@ubs.com This report has been prepared by UBS Brasil CCTVM S.A. ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON SLIDE 31 UBS does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
Agenda
• Rumo
1
• Brazilian automotive sector
• Tupy
2 • Randon
• Brazilian transportation sector
3
2Section 1
Rumo
3Rumo (Buy; PT R$6.0/share)
1 Investment thesis
Rumo
Successful R$2.6bn follow-on resolved liquidity issues and
Current Price (R$/shr) 4.7
reduced interest payments Rating:
Buy * Upside/Downside 27%
Market not pricing in improvements in Rumo's capacity or PT (R$/shr) Market Cap (R$mn) 934.6
concessions' renewal 6.0 ADTV L3M (R$mn) 48.1
– NPV considerably higher than possible liabilities
160
140
120
100
2 Triggers 80
60
Concession renewal 40
BNDES financing approval 20
0
Cash costs and expenses' improvements 1-Jan-13 1-Jan-14 1-Jan-15 1-Jan-16
IBOV Index RUMO3
Capacity expansion with investment plan
(R$ million) 2015 2016E 2017E 2018E 2019E 2020E 2021E
Net revenues 4,802 5,749 6,312 7,003 7,748 8,544 9,064
EBITDA 1,918 2,155 2,499 2,889 3,317 3,766 3,990
3 Risks Net Income
Net Income ¹
-400
-66
-441
-101
-57
331
238
653
527
963
821
1,306
1,010
1,551
Grain exports volume reduction Net Margin -1.4% -1.8% 5.2% 9.3% 12.4% 15.3% 17.1%
ROIC 4.0% 4.0% 4.7% 5.4% 6.3% 7.3% 7.9%
Risks embedded in investment plan / operations P/E n.m. n.m. 19.1x 9.7x 6.5x 4.8x 4.1x
EV/EBITDA 8.4x 6.8x 6.1x 5.3x 4.4x 3.6x 3.0x
Slowdown in grain export market
Net debt/EBITDA 5.1x 3.8x 3.6x 3.1x 2.5x 1.9x 1.4x
Net debt/EBITDA ex-financial lease 4.2x 3.0x 2.9x 2.5x 2.0x 1.5x 1.0x
Covenant 5.5x 5.5x 5.5x 5.5x 5.5x 5.5x 5.5x
Source: Bloomberg, Company data and UBS estimates 4Rumo (Buy; PT R$6.0/share) – North = threat for grain exports?
1 Grain exports - main corridors in Brazil 2 New projects in the Northern region
160,000 100%
Santana UBSe
140,000 90%
RR
AP Barcarena 80%
120,000
Itaqui 70%
São Luis: 8.5 mn ton 100,000 60%
AM
Manaus Santarem: MA
80,000 50%
2.6 mn ton 1.8 mn ton CE
RN
60,000 40%
Itacoatiara
PI
PB 30%
Expansion Plan PA
PE 40,000
Company Capacity Potential Inauguration Location 20%
AL
Amaggi 3.0 5.0 2020 Itacoatiara
TO SE
RO BA 20,000 10%
Cargill 2.0 5.0 2016 Santarem
Ceagro 6.8 6.8 2019 Santarem Salvador: 3.7 mn ton
Cianport 1.8 3.5 2018 Santana
0 0%
MT
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
2017E
2019E
2021E
2023E
2025E
Bunge 2.5 4.0 - Barcarena
DF
ADM 1.5 6.0 2016 GO Barcarena
MG
Hidrovias 4.4 6.5 2021 Barcarena
Wtorre 6.0 6.0 MS 2020 São Luis ES SOUTHEAST SOUTH NORTHEAST NORTH Market share South/Southeast
Tegram 5.0 10.0 2019 Itaqui Vitória: 6.9 mn ton
Total 33.0 52.8 SP
RJ 30.0 mn ton
Santos
ALL: 50% Market Share
PR
in 2015
SC Paranagua
S.F. Sul
9.3 mn ton
1 Projects in the North grabbed 5.4ppts of
RS Rio Grande ALL: 24% Market Share
in 2015
market share from the South in 2015
2 We expect this to continue going forward
3 Additional capacity will only be enough to
absorb the incremental grain production in
Brazil
Source: Aliceweb, Conab, Rumo and UBS 5Rumo (Buy; PT R$6.0/share) –operations
1 North operations (volumes in kton) 2 South operations (volumes in kton)
25,000 75% 80% 12,000 40%
68% 63% 35%
63% 66% 65% 67% 70% 35%
31% 32%
20,000 58% 10,000 29% 29%
60% 30%
53% 26% 25%
46% 50% 8,000 24%
15,000 25%
50%
40% 6,000 20%
10,000 30% 15%
4,000
20% 10%
5,000
10% 2,000
5%
0 0% 0 0%
2019E
2016E
2017E
2018E
2020E
2021E
2022E
2023E
2024E
2025E
2010
2011
2012
2013
2014
2015
2016E
2017E
2018E
2019E
2020E
2021E
2022E
2023E
2024E
2025E
2011
2012
2013
2014
2015
South operations - grain volumes
North operations - grain volumes Market share in Santos Market share in Southern ports
We expect ALL's market share in Santos' grain We estimate ALL's market share in Southern
exports to reach a peak of 75% by 2020 from ports' grain exports (Paranagua, Sao Francisco
the current 50%. do Sul and Rio Grande do Sul) to reach a peak
of 32% in 2017.
Source: Conab, Secex , Company data and UBS estimates 6Rumo (Buy; PT R$6.0/share) – recent follow-on
1 Rumo's current operations cash flow (no improvement capex considered)
3,000
2,000
1,000 Considering no further
0 improvement capex or
concession renewal, Rumo's
-1,000 cash flow would be positive
-2,000 and fair value would be
-3,000 R$4.2/shr
2014 2015 2016E 2017E 2018E 2019E 2020E
Expansion CAPEX Maintenance CAPEX
Operating cash-flow Operating cash-flow - Maintenance CAPEX
2 Deleverage due to follow-on 3 Debt restructuring plan
Amount % of debt
% of total
Debt/financing line involved maturing
5.0x 5.1x debt
(R$m) in 2016-18
New debentures 2,376 33% 23%
4.2x
3.8x 3.8x New amortization terms with
3.6x 550 8% 5%
Banco do Brasil
3.0x 3.1x
2.9x BNDES - possible credit line for
2.5x 1,500 21% 15%
2.5x financing transactions
2.0x BNDES - possible direct support
300 4% 3%
through convertible bonds
2014 2015 2016E 2017E 2018E 2019E BNDES - indirect support through
lending from commercial banks 1,000 14% 10%
Net debt/EBITDA Net debt/EBITDA ex-financial lease or bank guarantees
Total 5,726 79% 55%
Source: IMEA, AliceWeb, Rumo and UBS estimates 7Rumo (Buy; PT R$6.0/share) – concession renewal
ANTT will establish a
grant fee for Malha
Paulista based on the
estimated cash flow
from the concession in
2029-58 and expansion
investments
We calculate investments of
2.1 R$1.7bn and a grant fee of
6.0 0.5 6.5 R$1.3bn for Malha Paulista
1.4
4.2 1.7
Rumo-ALL
improvement
Malha Sul
PT w/ Malha
renewal
PT (R$/shr)
liabilities
Paulista
Potential
renewal
Malha
Current
Capex
Sul
ST
Source: Bloomberg, Company data and UBS estimates 8Rumo (Buy; PT R$6.0/share) – possible liabilities
Liability Possible NPV impact (UBSe)
1 Unpaid lease and concession fees R$0.94bn
2 Sub-investments in the rail network R$1.2bn
3 Agrovia lawsuit R$0.15bn
4 Maximum tariff R$0
Malha Paulista: Unpaid lease and concession fees (R$m) Malha Oeste: Unpaid lease and concession fees (R$m)
200 10% 70 45%
May/05 May/2000 40%
60
8% 35%
150 50
30%
6% 40 25%
100
4% 30 20%
15%
50 20
2% 10%
10 5%
0 0% 0 0%
1999
2001
2003
2005
2007
2009
2011
2013
2015
2017
2019
2021
2023
2025
2027
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
Malha Paulista - Lease and concession fee
% net revenue Malha Paulista Malha Oeste - Lease and Concession Fee % net revenue Malha Oeste
Sub-investments: estimated cost to return non-operational rail stretches (R$m)
Investment requirements FCA Malha Sul
Mar/12 terms 876.0 Total km 6,586
2015 terms 1,260.8 Abandoned ratio 24%
km returned 742 km returned 1,581
Investment / km (R$m) 1.70 Investment requirements 2,686
Source: Bloomberg, Company data and UBS estimates 9Section 2 Auto parts
Brazil autos – government incentives fueled sales in recent past
1 IPI tax benefit for light vehicles 2 PSI attractive financing conditions for heavy vehicles
Dec/08 - Apr/22/12 - Jan/13- Abr/13 - Jan/14 - Jan/15- Announcement Maximum Maximum Period
Sep/09 Dez/12 Mar/13 Dez/13 Dez/14 Dec/15
Interest Rate Valid Until
Standard (valid as of) Percentage Financed Financed
Cars April, 2011 10.0% n.a. 90% 96 months
1,000cc 7% 0% 0% 2% 2% 3% 7% April, 2012 7.7% December 31, 2013 100% 120 months
1,000-2,000cc (Ethanol/Flex) 11% 5.5% 5.5% 7% 7% 9% 11% May, 2012 5.5% August 31, 2012 100% 120 months
1,000-2,000cc (Gasoline) 13% 6.5% 6.5% 8% 8% 10% 13%
August, 29, 2012 2.5% December 31, 2012 100% 120 months
>2,000cc (Ethanol/Flex) 18% 18% 18% 18% 18% 18% 18%
1st Semester, 2013 3.0% June 30, 2013 100% 120 months
>2,000cc (Gasoline) 25% 25% 25% 25% 25% 25% 25%
2nd Semester, 2013 4.0% December 31, 2013 100% 120 months
Light commercial vehicles
1,000cc 8% 1% 1% 2% 2% 3% 8% January, 2014 6.0% n.a. 80% 120 months
1,000-2,000cc 8% 4% 1% 2% 2% 3% 8% April, 2014 6.0% n.a. 90% 120 months
August, 2014 6.0% December 31, 2014 100% 120 months
January, 2015 10.0% December 31, 2015 50% 120 months
3 Light vehicles: historical sales (m units) 4 Heavy vehicles: historical sales (thousand units)
200 60%
4.0 40% 180
3.5 160 40%
30%
3.0 20% 140 20%
2.5 120
10%
2.0 100 0%
0% 80
1.5
-10% 60 -20%
1.0
0.5 -20% 40 -40%
20
0.0 -30%
0 -60%
2000
2002
2004
2006
2008
2010
2012
2014
2016E
2018E
2020E
2000
2002
2004
2006
2008
2010
2012
2014
2016E
2018E
2020E
Light vehicle sales (mn units) % YoY
Truck sales (thousand units) % YoY
Source: Fenabrave, local newswires, ANFAVEA, UBS estimates 11Brazil autos – another year of weak volumes
1 Light vehicles sales (mn units) 2 Trucks sales (units)
400 20% 16,000 10%
350 10%
Sales volume (mn units)
14,000 0%
Sales Volume (units)
300 0% 12,000 -10%
250 -10% 10,000 -20%
YoY
200 -20% 8,000 -30%
150 -30% 6,000 -40%
100 -40% 4,000 -50%
50 -50% 2,000 -60%
0 -60% 0 -70%
Jan-14
Jan-15
Jan-16
Oct-14
Oct-15
Apr-14
Jul-14
Apr-15
Jul-15
Apr-16
May-14
May-15
May-16
Jan-14
Jan-15
Jan-16
Mar-14
Sep-14
Mar-15
Sep-15
Mar-16
Jul-14
Jul-15
Nov-14
Nov-15
3 2016 sales growth YoY 4 Is the 2016E drop enough to reach sustainable levels?
Truck and light vehicles mildly below sustainable levels
Bus to end the year much below sustainable levels
Vehicle fleet expansion
Light vehicles Trucks Buses
-43%
1978-2015:
Fleet CAGR 4.6% 2.0% 3.6%
-31%
-30%
-30%
-26%
-25%
GDP CAGR 2.6% 2.6% 2.6%
-24%
-20%
-19%
GDP elasticity 1.8x 0.8x 1.4x
2008-2015:
Fleet CAGR 5.8% 5.7% 4.0%
GDP CAGR 1.3% 1.3% 1.3%
Light vehicles Trucks Bus GDP elasticity 4.5x 4.3x 3.1x
2016-25 (perpetuating 2016E sales levels):
YTD sales YTD sales level annualized¹ UBSe 2016 2016-25 Fleet CAGR 0.7% -0.2% -1.0%
GDP CAGR 1.2% 1.2% 1.2%
GDP elasticity 0.6x -0.2x -0.8x
Source: Fenabrave, UBS estimates 12Brazil autos – truck sales: one more negative year to go?
Transportation companies: cost increases; pressured freight prices; Truck sales to reach industry scrap rate levels (55-60k) given
oversupplied truck fleet transportation companies' low utilization of truck fleet
200 10% 200,000 UBSe
Downside Upside Base case
180 8%
150,000
160 6%
100,000
140 4%
120 2% 50,000
100 0%
0
Jul-11
Jul-12
Jul-13
Jul-14
Jul-15
Apr-11
Apr-12
Apr-13
Apr-14
Apr-15
Jan-11
Oct-11
Jan-12
Oct-12
Jan-13
Oct-13
Jan-14
Oct-14
Jan-15
Oct-15
1957
1960
1963
1966
1969
1972
1975
1978
1981
1984
1987
1990
1993
1996
1999
2002
2005
2008
2011
2014
2017
2020
2023
Average truck transportation costs (R$/ton) %YoY
We estimate truck sales will drop 25% in 2016
Domestic truck fleet
2,500,000 Scenarios Base-case Upside Downside
Downside Upside Sales growth 2016 -25.0% -20.0% -30.0% 1978-2015
2,000,000 Production growth 2016 -2.5% 4.0% -9.0% Fleet CAGR 2.0%
Sales growth 2017 0.0% 0.0% 0.0% GDP CAGR 2.6%
1,500,000 2018-25 sales growth rate 4.6% 5.8% 3.3%
2016-25 Fleet CAGR 0.2% 0.6% -0.1% 2008-2015
1,000,000 GDP elasticity 0.20x 0.50x -0.10x Fleet CAGR 5.7%
Truck fleet will likely grow GDP 2016-25 (UBS) 1.2% 1.2% 1.2% GDP CAGR 1.3%
Freight companies are currently slowly in the next 10 years as
500,000 running at an 86.5% utilization Fleet CAGR 2026 onward 1.0% 1.7% 0.3% GDP elasticity 4.3x
a result of current idle
rate vs. the normal level of 95%. capacity GDP 2026+ (UBS) 2.0% 2.0% 2.0%
0
1978 1983 1988 1993 1998 2003 2008 2013 2018 2023
Source: NTC, ANFAVEA, UBS estimates 13Brazil autos – light vehicle sales: short-term pressure
Bad combo: low consumer confidence, rising unemployment, high Light vehicle sales to drop further 2016, but with fleet still increasing
interest rates and tighter credit
4,500,000 UBSe
200 14% 4,000,000
12% 3,500,000
3,000,000
150 10% 2,500,000
8% 2,000,000
100 1,500,000
6%
1,000,000
50 4% 500,000
Our macro team expects Brazil to reach 12% unemployment rate in 2017 2% 0
1957
1960
1963
1966
1969
1972
1975
1978
1981
1984
1987
1990
1993
1996
1999
2002
2005
2008
2011
2014
2017
2020
2023
0 0%
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Jan-15
Downside Upside
Consumer confidence index (LHS) Unemployment rate (%, RHS)
Light vehicle fleet to continue expanding even with the sales drop; Light vehicle main assumptions
vehicle penetration also catching up
60,000,000 25x Scenarios Base-case Upside Downside
Light vehicle fleet (units)
Inhabitants per vehicle Sales growth 2016 -20.0% -15.0% -25.0% 1978-2015
UBSe
50,000,000 20x Production growth 2016 -11.4% -5.8% -16.9% Fleet CAGR 4.6%
40,000,000 Sales growth 2017 0.0% 0.0% 0.0% GDP CAGR 2.6%
15x
30,000,000 2018-25 sales growth rate 7.0% 7.8% 5.7% GDP elasticity 1.8x
10x 2016-25 Fleet CAGR 2.1% 2.7% 1.5% 2008-2015
20,000,000
GDP elasticity 1.70x 2.20x 1.20x Fleet CAGR 5.8%
10,000,000 05x
GDP 2016-25 (UBS) 1.2% 1.2% 1.2% GDP CAGR 1.3%
0 00x Fleet CAGR 2026 onward 3.4% 4.4% 2.4% GDP elasticity 4.5x
1973
1976
1979
1982
1985
1988
1991
1994
1997
2000
2003
2006
2009
2012
2015
2018
2021
2024
GDP 2026+ (UBS) 2.0% 2.0% 2.0%
Inhabitants per vehicle in base case (RHS) Downside Upside Base case
Source: IBGE, FGV, Fecomercio, ANFAVEA, UBS estimates 14Brazilian auto parts – looking at companies' exposure
1 Geographic exposure 2 Market exposure
Domestic market, exports and Sales to OEMs, direct sales to
foreign operations consumers and aftermarket
Direct to
Aftermarket consumers
Others
30% 42%
5% Others
Foreign Operations Exports 6%
43% Direct to OEM OEM
OEM OEM consumers 37% 94%
70% 100%
78% 19% 100%
46% 37%
27% 9% Aftermarket
8% 16%
Iochpe-Maxion Mahle Marcopolo Randon Tupy
Iochpe-Maxion Mahle Marcopolo Randon Tupy
Exports benefit from BRL depreciation Aftermarket business is closely related to
(revenues in USD and costs in BRL) vehicle fleet, rather than vehicle sales
Best positioned companies:
Tupy: high exposure to exports and diversification within automotive segments (light, heavy, off-road)
Mahle: high exposure to exports and aftermarket
• Iochpe: considerable participation of foreign operations
• Marcopolo: exports and foreign operations
x Randon: high exposure to domestic truck market
Source: Iochpe, Mahle, Marcopolo, Randon, Tupy, UBS 15Brazilian auto parts – UBS view on foreign markets
1 Light vehicle sales 2 Heavy vehicle sales
0.7
24 UBSe
UBSe
22 0.6
20 0.5
Million units
Million units
18 0.4
16 0.3
14 0.2
12 0.1
10 0.0
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
North America Europe North America Europe
3 Automotive sales growth assumptions 4 Brazil's automotive bilateral agreements
% of Brazilian exports 2014 domestic market
%YoY 2016E 2017E 2018E 2019E 2020E Country Status
in 2014 (UBSe) size ('000 vehicles)
Signed in Mar/15 - limits exports to US$1.6bn in Mar/16-
Europe 2.6% 2.9% 2.7% 2.5% 0.2% Mexico 6% 1,102
Mar/17 period
Light vehicles
North America -1.5% 3.4% 1.9% 0.5% 0.7% Signed in Jun/15, but expires in Jun/16. Every US$1
Argentina 66% 964 imported by Brazil grants the right to export US$1.5
Europe -2.8% 1.8% 1.8% 1.8% 1.7% with no tax burden
Heavy vehicles Signed in Oct/15 - limits export to12k vehicles in 2016,
North America -20.4% 8.9% 1.2% 1.2% 1.2% Colombia n.a. 294
25k in 2017 and 50k in 2018
Uruguay 4% 57 Signed in Dec/15
Still under negotiation -- curently, the agreement
Peru n.a. 187 reaches zero tax burden in 2019, but the negotiation is
to anticipate this event
Chile n.a. 354 Still under negotiation
Equador n.a. 120 Still under negotiation
Source: Iochpe, Mahle, Marcopolo, Randon, Tupy, UBS estimates 16Brazil autos – can exports save the day?
Industry exports as % of production – historically, exports have Light vehicle exports' correlation with Brazilian export
played a bigger role in bus production attractiveness index¹
50% 250 1000
Bus
40% Light vehicles 200 800
Trucks
150 600
30%
100 400
20%
50 200
2-3 year lag
10% 0 0
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
0%
1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 Attractiveness Index (LHS) Light vehicle exports (RHS, 100 basis)
Truck exports' correlation with Brazilian export Bus exports' correlation with Brazilian export attractiveness
attractiveness index¹ index¹
250 500 250
450
200 400 200
350
150 300 150
250 100
100 200
150 50
50 100 2-year lag
4-5 year lag 50 0
0 0
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Attractiveness Index (LHS) Bus exports (RHS, 100 basis)
Attractiveness Index (LHS) Truck exports (RHS, 100 basis)
Source: ANFAVEA, Fabus, UBS // ¹Our index considers the cost of producing a product in Brazil, adjusted annually for inflation differential and average FX 17Brazil autos
1 What's priced in?
Upside/downside perpetuating 2016E sales level
60%
8% 5%
-11%
-4%
TUPY POMO LEVE MYPK RAPT
2 Estimated impact from the possible end of government incentives
Included in
TUPY POMO LEVE MYPK RAPT
base case?
End of subsidized financing lines -1.3 -0.6 -1.6 -2.4 -1.7 Yes
End of interest on own capital -2.2 -0.2 -2.1 -0.3 -0.4 No
End of Lei do Bem -0.1 -0.1 -0.4 -0.1 -0.1 No
Total -3.6 -0.9 -4.0 -2.8 -2.2
% of current price 28% 39% 16% 18% 72%
Source: ANFAVEA, Fabus, UBS 18Tupy (Buy; PT R$21.5/share)
1 Investment thesis
Recent sale of stakes from large shareholders has created a market Tupy
overhang Current Price (R$/shr) 12.6
Rating:
Market leader with diversified revenue stream Buy Upside/Downside 70%
Drop in profitability due to BRL appreciation already priced in PT (R$/shr) Market Cap (R$mn) 1,818.1
Product mix improvements (CGI and machining) 21.5 ADTV L3M (R$mn) 5.5
Top-notch engineering team to grant market share gains
120
100
2 Triggers 80
BRL depreciation 60
Ramp-up of recent contracts 40
Possible accretive acquisitions 20
0
New contracts with OEMs 1-Jan-13 1-Jan-14 1-Jan-15 1-Jan-16
IBOV Index TUPY3
3 Risks (R$ million) 2013 2014 2015 2016E 2017E
Net revenues 3,123 3,115 3,427 3,399 3,528
Further downfall in O&G industry EBITDA 464 503 598 507 528
Engine blocks' migration to aluminium EBITDA Margin 14.9% 16.2% 17.5% 14.9% 15.0%
Net Income 86 89 220 127 143
Automotive industry downturn
Net Margin 2.8% 2.9% 6.4% 3.8% 4.1%
Possible divestments from large shareholders ROIC 8.6% 7.9% 8.2% 6.3% 8.1%
P/E 19.6x 16.6x 6.9x 11.4x 10.6x
EV/EBITDA 6.8x 6.9x 4.7x 4.9x 4.6x
Net debt/EBITDA 1.3x 1.6x 1.6x 1.2x 1.1x
Source: Bloomberg, Company data and UBS estimates 19Tupy (Buy; PT R$21.5/share) – trends going forward
1 OEMs outsourcing machining to foundries 2 CGI (compacted graphite iron)
18% 15%
16%
14%
10%
8%
2013 2014 2015 2013 2014 2015
% of machining (over automotive volumes) % of CGI (over automotive volumes)
3 OEMs' outsourcing foundry activities
44%
We expect these trends to
23%
support Tupy's growth in
10% the mid-to-long term
1999 2013 2017E
% of iron B&H capacity owned by OEMs
Source: Company, Bloomberg and UBS estimates 20Tupy (Buy; PT R$21.5/share)
10.0x 40.0x
Multiples (12M FWD)
35.0x
8.0x
30.0x
6.0x 25.0x
20.0x
4.0x 15.0x
10.0x
2.0x
5.0x
0.0x 0.0x
Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16
EV/EBITDA -1 StDev +1 StDev Avg P/E -1 StDev +1 StDev Avg
Terminal Growth 2016 FX rate (BRL/USD) - end of period
PT sensitivity analysis
22 3.5% 4.0% 4.5% 5.0% 5.5% 6.0% 6.5% R$ 21.5 3.30 3.40 3.50 3.60 3.70 3.80 3.90
12.0% 26.7 27.4 28.2 29.1 30.2 31.5 33.0 12.0% 16.1 16.5 17.0 17.5 18.0 18.5 18.9
13.0% 24.2 24.7 25.3 26.0 26.8 27.6 28.6 13.0% 17.4 17.8 18.3 18.8 19.3 19.8 20.3
14.0% 22.2 22.6 23.0 23.5 24.1 24.7 25.4 Long- 14.0% 18.6 18.6 19.7 20.2 20.7 21.2 21.7
Cost of Term
15.0% 20.5 20.8 21.1 21.5 21.9 22.4 22.9 15.0% 19.9 20.4 21.0 21.5 22.1 22.6 23.1
Equity EBITDA
16.0% 19.1 19.3 19.6 19.9 20.2 20.6 20.9 margin 16.0% 21.8 22.4 23.0 23.5 24.1 24.1 25.2
17.0% 17.9 This material
18.1 18.3been prepared
has 18.5 18.8
by 19.1
UBS Limited 19.3 17.0% 25.2 23.7 23.7 24.9 24.9 26.0 26.0
18.0% 16.9 17.0 17.2 17.4 17.6 17.8 18.0 18.0% 24.4 24.4 25.6 25.6 26.8 26.8 28.0
Commercial LatAm
Revenue Breakdown
Vehicles 19%
55%
Off-road Light
21% Vehicles
18%
Hydraulics Europe
6% 16%
NAFTA
60% Others
5%
Source: Company, Bloomberg and UBS estimates 21Randon (Neutral; PT R$3.6/share)
1 Investment thesis
Randon
Weak truck industry to remain affecting Randon, partially offset Rating: Current Price (R$/shr) 3.0
by cost reduction efforts Neutral Upside/Downside 20%
Postponement in truck and truck body renewal due to PT (R$/shr) Market Cap (R$mn) 840.5
oversupply in fleet and pressured transportation industry
3.6 ADTV L3M (R$mn) 4.9
Fras-le supporting a less significant drop in results
Truck body price war to reduce in the coming years 120
100
2 Triggers 80
60
Competitors' slowdown in operations given pressured financial
situation 40
20
Fleet renewal program (trucks, truck bodies or rail wagons)
0
Rail wagon orders 1-Jan-13 1-Jan-14 1-Jan-15 1-Jan-16
Possible acquisitions from its subsidiary Fras-le IBOV Index RAPT4
3 Risks (R$ million) 2013 2014 2015E 2016E 2017E
Net revenues 4,253 3,779 3,099 2,742 2,939
Relationship with OEMs EBITDA 587 490 162 214 268
Truck segment deterioration EBITDA Margin 13.8% 13.0% 5.2% 7.8% 9.1%
Discontinuation of BNDES financing lines Net Income 258 202 -25 15 69
Net Margin 6.1% 5.3% -0.8% 0.6% 2.4%
Randon bank's increase in delinquency
ROIC 12.6% 9.2% 0.9% 2.1% 4.2%
Debt roll-over in coming years P/E 10.6x 9.5x -42.8x 69.1x 15.2x
EV/EBITDA 7.8x 6.9x 16.5x 10.3x 8.2x
Net debt/EBITDA 1.6x 1.5x 6.5x 2.4x 1.9x
Source: Bloomberg, Company data and UBS estimates 22Randon (Neutral; PT R$3.6/share) – Fras-le, an important asset
1 What's behind Fras-le's good operating momentum?
High exposure to aftermarket (85% of total revenues, including domestic and foreign markets)
Considerable revenues from foreign market (51% of total revenues)
Exports have benefitted from the BRL depreciation in 2015 (costs in BRL, while revenues in USD)
2 Fras-le as % of Randon's figures 3 EBITDA margin: Fras-le vs Randon ex-Fras-le
90% 25%
80%
20%
70%
60%
15%
50%
40% 10%
30%
5%
20%
10%
0%
2010 2011 2012 2013 2014 2015 1Q16
2010 2011 2012 2013 2014 2015 1Q16
% of Randon's revenues % of Randon's EBITDA
Randon ex Fras-le Fras-le
Source: Bloomberg, Company data and UBS estimates 23Randon (Neutral; PT R$3.6/share)
20.0x
Multiples (12M FWD)
15.0x
10.0x
5.0x
0.0x
Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16
EV/EBITDA -1 StDev +1 StDev Avg
Terminal Growth Auto Parts EBITDA Margin 2021+
PT sensitivity analysis
#### 10.5% 12.5% 13.5% 14.5% 15.5% 17.5% 18.5%
#### 4.0% 4.5% 5.0% 5.5% 6.0% 6.5% 7.0%
7% 2.6 2.9 3.0 3.2 3.3 3.6 3.7
12.0% 5.6 5.4 5.2 4.9 4.6 4.2 3.8
13.0% 5.0 4.8 4.6 4.4 4.1 3.8 3.4 8% 2.7 3.0 3.2 3.3 3.5 3.8 3.9
Trailers 9% 2.9 3.2 3.3 3.5 3.6 3.9 4.1
14.0% 4.5 4.3 4.1 3.9 3.7 3.4 3.1
Cost of EBITDA
14.8% 4.2 4.0 3.8 3.6 3.4 3.2 2.9 10% 3.1 3.4 3.5 3.6 3.8 4.1 4.2
Equity Margin
15.0% 4.1 4.0 3.8 3.6 3.4 3.1 2.9 2021+ 11% 3.2 3.5 3.7 3.8 4.0 4.2 4.4
16.0% 3.8 3.6 3.5 3.3 3.1 2.9 2.7 12% 3.4 3.7 3.8 4.0 4.1 4.4 4.5
17.0% 3.5 3.4 3.2 3.1 2.9 2.7 2.5 13% 3.6 3.9 4.0 4.1 4.3 4.6 4.7
Vehicles, NAFTA Mercosul
Revenue Breakdown
Autoparts 4%
50% trailers and + Chile
semi-trailers 5%
Others
46% 3%
Financial
Services
5%
Domestic
88%
Source: Company, Bloomberg and UBS estimates 24Randon (Neutral; PT R$3.6/share) – truck trailers' price war?
1 Randon trailer division EBITDA margin 2 Truck body industry market share
24% 25% 26% 26% 28% 28% 26% 27% 30%
2% 3%
7% 4% 5%
5.2%
6% 6% 7% 9% 11% 11%
7% 10%
7%
2.9%
2.4%
14% 13% 7% 10% 9%
14%
11.0%
16.4%
12.3%
11.4%
10.5%
10.0%
11% 10%
-0.7%
11%
8.4%
0.1%
12% 10% 12%
15% 15% 15% 12%
16% 15% 11% 12% 12% 11%
38% 37% 33% 35% 32% 33% 30% 29% 27%
2008
2009
2010
2011
2012
2013
2014
2015
2016E
2017E
2018E
Steady-state
2006 2007 2008 2009 2010 2011 2012 2013 2014
Truck trailers and rail wagons: EBITDA Margin Randon Guerra Facchini Noma Librelato Outros
3 Competitors' EBITDA margin 4 Competitors' net debt/EBITDA
20.0% 7.0
15.0% 6.0
5.0
10.0% 4.0
5.0% 3.0
2.0
0.0% 1.0
-5.0% 0.0
(1.0)
-10.0% (2.0)
2008 2009 2010 2011 2012 2013 2014 2008 2009 2010 2011 2012 2013 2014
Randon truck trailers Librelato Noma Guerra Facchini Randon Librelato Noma Guerra Facchini
Source: companies and UBS estimates 25Section 3 Brazil Transportation
Transportation – Brazil's infrastructure package
1 Selected companies' participation in past auctions (investment amount, 2015 real terms)
1990-2003¹ R$46bi
2004-2011¹ R$51bn
2011-15¹ Invepar Triunfo Odebrecht R$100bn
Expected Auctions 2016¹ R$31bn
Expected Auctions 2017-
R$49bn
2018¹
Expected urban mobility
R$27bn
auctions
CCR Ecorodovias Others
2 In 2011-14, Federal road and airport concessions required 4 Possible upside in company's firepower to bid on new
~30% of total investments to be invested in the first three projects
years of concessions
Capacity to
2016E 2017E 2018E
invest (R$mn)¹
100% Investment distribution CCRO 3,806 5,021 5,981
90%
in 2011-14 concessions ECOR 769 1,113 1,533
80%
70% Maximum amount of new
60% 2016E 2017E 2018E
projects' investments (R$mn)²
50%
40% CCRO 14,271 18,826 22,424
30% ECOR 2,883 4,175 5,746
20%
Upside potential
10% 2016E 2017E 2018E
0% (R$ per share / %)
CCRO 3.1 / 20% 4.1 / 26% 4.9 / 31%
Year 10
Year 0
Year 1
Year 2
Year 3
Year 4
Year 5
Year 6
Year 7
Year 8
Year 9
ECOR 1.7 / 22% 2.4 / 31% 3.3 / 43%
Airport Federal Road Concession
State Road Concession Urban Mobility * Capacity to invested calculated based on a maximum 3.5x net debt/EBITDA
Source: companies and UBS estimates 27Transportation – Main concessions to be auctioned
1 How the government could increase the attractiveness of 2 Main concession opportunities for toll road players
the concessions in the infrastructure package: Expected in 2016 Capex (R$bn) Expected in 2017-2018
Roadway 21.4 Roadway
BR-476/153/282/480/PR/SC 5.3 BR-163/MT/PA
Increasing the auctions' tariff caps, since the new price BR-364/GO/MG 3.7 BR-364/060/MT/GO
levels make sense for consumers (i.e., increasing the projects' SP-191/255/281/318/330/334/345/351 BR-101/116/290/386/RS
IRRs) SP-333/322/330
12.4
BR-101/193/465/RJ/SP
SP-055¹ BR-101/232/PE
Reducing the size of concessions SP-079 / SP-250¹ BR-101/BA
Increasing the extension period of concessions BR-101/SC
Airports 9.9 BR-262/381/MG
Separating the most attractive stretches, if there is no Fortaleza 2.1 BR-262/MS
interest in the whole roadway Salvador 3.5 BR-267/MS
Florianopolis 1.3 BR-280/SC
Underwriting private financing lines and bonds through
Porto Alegre 2.9 BR-364/RO/MT
BNDES Total 31.3 BR-470/282/SC
Establishing traffic thresholds to trigger duplicate Total
Expected in 2016 Capex (R$bn) Expected in 2017-2018 Capex (R$bn)
investments, reducing traffic-risk Urban mobility projects (timing expectation not49.4
available)
Roadway 21.4 Roadway
Subsidizing toll fares – the least likely option, in our view,
BR-476/153/282/480/PR/SC 5.3 Intercity train (SP)
BR-163/MT/PA 6.4
7.8 Curitiba Subway
given the current fiscal situation BR-364/GO/MG 3.7 BHTE Subway
BR-364/060/MT/GO 2.0
4.9 Porto Alegre Subway
SP-191/255/281/318/330/334/345/351 Confins Light Rail
BR-101/116/290/386/RS 6.2
3.8 Florianópolis Crossing
SP-333/322/330 BSB Subway
BR-101/193/465/RJ/SP 2.7
3.7 SP Subway (lines 20, 5 and 17)
12.4
SP-055¹ RJBR-101/232/PE
Subway - Line 3 (Niteroi) 3.5
4.9
SP-079 / SP-250¹ Total
BR-101/BA 1.9
BR-101/SC 1.3
Airports 9.9 BR-262/381/MG 2.2
Fortaleza 2.1 BR-262/MS 2.9
Salvador 3.5 BR-267/MS 2.4
Florianopolis 1.3 BR-280/SC 2.5
Porto Alegre 2.9 BR-364/RO/MT 7.4
Total 31.3 BR-470/282/SC 3.8
Total 49.4
Urban mobility projects (timing expectation not available)
Intercity train (SP) 6.4 Curitiba Subway 5.3
BHTE Subway 2.0 Porto Alegre Subway 2.9
Confins
Source: Federal government, ARTESP, UBSLight Rail 6.2 Florianópolis Crossing 1.2 28
BSB Subway 2.7 SP Subway (lines 20, 5 and 17) 17.7
RJ Subway - Line 3 (Niteroi) 3.5Transportation – Upcoming concessions
New Federal Package 2015 Total Investments = R$ 198.4 bn
Extension New Capex
Railway Rail Name
(km) (R$ bn)
Palmas/TO-Anapolis/GO and
Ferrovia Norte-Sul 1,430 7.8
Expected to be auctioned in 2016-18 Barcaran/MA-Acailandia/PA
Extension New Capex (R$ Anpolis/GO-Estrela D'Oeste/SP-Tres Lagoas Ferrovia Norte-Sul 895 4.6
Roadway (km) bn) Lucas do Rio Verde/MT-Miritituba/PA - 1,140 9.9
Rail Rio de Janeiro/RS-Vitoria/ES - 572 7.8
Campinorte-Lucas do Rio Verde-
BR-163/MT/PA 976 6.6 Ferrovia Bioceanica 3,500 40.0
Porto Velho-Rio Branco
BR-364/060/MT/GO 704 4.1
Subtotal 7,537 70.1
BR-364/GO/MG 439 3.1
Contract Amendments 16.0
BR-476/153/28/2/480/PR/SC 460 4.5
Total 86.1
BR-101/116/290/386/RS 581 3.2
BR-101/193/465/RJ/SP 357 3.1
Airport 2014 PAX (mln) New Capex (R$ bn)
Fortaleza 6.5 1.8
BR-101/232/PE 564 4.2 Type New Capex (R$ bn) Salvador 9.2 3.0
BR-101/BA 199 1.6 50 Renewals of Expired Concessions 11.9 Florianopolis 3.6 1.1
BR-101/SC 220 1.1 Port 63 Authorizations of Private Terminals 14.7 Porto Alegre 8.4 2.5
BR-262/381/MG 305 1.9 24 Renewals of Existing Concessions 10.8 7 Regional Airports - 0.1
BR-262/MS 327 2.5 Total 37.4 Total 8.5
BR-267/MS 249 2.0
Airport
Road BR-280/SC 307 2.1 Araras
Braganca Paulista
BR-364/RO/MT 806 6.3
Caldas Novas
BR-470/282/SC 455 3.2
Campinas (Amarais)
Total 6,949.0 49.6
Itanhaem
Jundiai
Ubatuba
Contract Amendments
Extension New Capex
Roadway Road Name Company Expiry
(km) (R$ bn)
BR-393/RJ Rodovia do Aco Acciona Mar-33 200 1.3
BR-101/376/116/SC/PR Regis Bittencourt Arteris Feb-33 402 0.9
BR-101/RJ Fluminense Arteris Feb-33 320 1.2
BR-116/PR/SC Planalto Sul Arteris Feb-33 413 2.5
BR-381/SP/MG Fernao dias Arteris Feb-33 562 0.6
BR-116/SP/RJ - Dutra Nova Dutra CCR Oct-20 402 2.3
BR-324/116/BA Via Bahia Isolux + Engevix Oct-34 681 0.4
BR-163/MT Rota do Oeste Odebrecht Mar-44 851 0.8
BR-040/RJ Concer Triunfo Oct-20 180 1.1
BR-153/SP Transbrasiliana Triunfo Feb-33 322 4.0
BR-290/RS - Freeway Concepa Triunfo + SBS Feb-17 121 0.2
Total 4453 15.3
Source: Federal government, UBS 29Transportation – Road concessions: A long way to be paved
1 Currently, only 12% of Brazilian roadways are paved 2 Only 9% of paved roads are operated by private companies
through concessions since 1995. Another 3% of paved roads
are expected to be auctioned in 2015-18
Paved
12% To be auctioned
3% Current
Concessions
9%
1,720,643 km
210,619 km
Non Paved
88% Not Conceived
88%
3 Seven groups concentrate ~80% of current road 4 Only few players are likely to bid in the next concession
concessions, three of which seem to be currently focused on auctions
managing recently-incorporated projects
Company Evidence M
Arteris
Firepower to win concessions with total investment of up to R$18.8bn;
19% CCR
recently rolled over more than half its expiring debt
AB Concessões The company did not participate in concession auctions in the recent past.
Others Ecorodovias Net Debt/EBITDA at 3.1x in 4Q15
21% CCR Galvão Engenharia
The company is currently divesting from a recently won concession
16% (possible sale of BR-153 concession, won in 2014)
19,656 km Invepar
High leverage (6.9x Net Debt/EBITDA in 4Q15); potential change in the
Atlantia+Bertin controlling group due to the sale of OAS shares
7% Looking for new partners and funding for current projects; possible
Odebrecht Transport
divestments in the short-term; renegotiating debt maturity
EcoRodovias
Tirunfo 10% Recently sold assets to deleverage, high capex scheduled in recently won
Triunfo
12% auctions
Invepar Odebrecht
9% 6%
Source: DNIT and UBS 30Valuation Method and Risk Statement
For auto parts companies, our price targets for all companies are DCF-based. The automotive industry is very sensitive to abrupt changes in the domestic macroeconomic
environment, and any slowdown could weigh on the sector. Besides the macro effect, the sector is also exposed to risks related to operating performance and the
competitive landscape. We outline tight credit, a lack of government incentives and labour cost inflation as the main risks to the automotive industry in Brazil. The steel
sector and underlying supply and demand are heavily influenced by trends in global economic conditions and currency volatility, in addition to raw material price
fluctuations. Regulatory risk is also material, given continuously changing mining laws and royalty regulations. For toll roads, our fair value derives from DCF analysis. The
toll road industry is regulated by federal and state government agencies. Changes in the regulatory framework could affect industry profitability. Moreover, toll road
concessionaries are affected by inflation, GDP growth and the FX rate. Natural disasters can also affect their operations. Companies may also revise estimated investments
required for concessions’ contractual obligations. Our PT for RUMO is based on DCF. Railway transportation in Brazil is regulated by the federal government ground
transportation agency. Changes in the regulatory framework could have negative consequences for industry profitability. RUMO and other rail companies could be affected
by GDP growth, inflation, diesel prices and the FX rate. Natural disasters and unexpected crop failures could also affect operations. Our price target for Localiza is DCF-
based. Localiza is subject to local macroeconomic conditions, and negative economic developments, GDP growth, inflation and interest rates could have an adverse impact
on the company's results. In addition, company-specific risks include cost of growth and proper execution of growth strategies. Our valuation for airline companies derives
from 2017 target EV/EBITDAR multiples. Trading airline stocks may be hazardous to your wealth. Over the long term, a diversified portfolio of airline stocks has reliably
underperformed broader market averages. Our estimates – which form the basis for our valuations and stock price targets – are subject to a very high degree of error and
could be materially inaccurate. This forecast error is driven primarily by revenue volatility – a function of unpredictable business travel spending, combined with significant
operating and financial leverage. Other sources of error include, but are not limited to, jet fuel price volatility, labor disruptions, discount carrier growth, currency
depreciation, bankruptcy risk and significant event risk associated primarily with natural disasters or terrorist actions. Our valuation for loyalty companies derive from DCF
analysis. Multiplus and Smiles could face conflicts of interest with their respective parent airline companies, TAM and GOL. Intercompany and related-party transactions not
on market conditions could be negative for minority shareholders. The companies' results are highly dependent on the performance of financial institutions and airlines.
The companies are also exposed to foreign currency, as points sold to financial institutions are USD-denominated. Other frequent flyer programs, as well as loyalty
programs such as Dotz, could increase competition in the industry. Regulatory and taxation risks could negatively affect companies' performance. Our price targets for
Mexican Airports are derived using DCF. Risks to GAP, ASUR, and OMA include macroeconomic impacts (especially unexpected declines in consumer confidence in the US
and Mexico, which could negatively impact both business and leisure travel), regulatory changes (as Mexican airports operate under government concessions), airline
industry structure (ceasing of operations, or unsuccessful launch of new LCCs), weather (particularly for beach destinations), oil prices (as they affect airfares), health-related
threats such as SARS, and the granting of new concessions in their areas of operation (which could capture traffic growth in those regions).
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to each security or issuer that the analyst covered in this report: (1) all of the views expressed accurately reflect his or her
personal views about those securities or issuers and were prepared in an independent manner, including with respect to UBS,
and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific recommendations or
views expressed by that research analyst in the research report.
31Required Disclosures
This report has been prepared by UBS Brasil CCTVM S.A., an affiliate of UBS AG. UBS AG, its subsidiaries, branches and affiliates are referred to herein as UBS.
For information on the ways in which UBS manages conflicts and maintains independence of its research product; historical performance information; and certain additional disclosures concerning UBS research
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debt securities (or in related derivatives) that may be the subject of this report.
UBS Investment Research: Global Equity Rating Definitions
12-Month Rating Definition Coverage1 IB Services2
Buy FSR is > 6% above the MRA. 49% 32%
Neutral FSR is between -6% and 6% of the MRA. 38% 26%
Sell FSR is > 6% below the MRA. 14% 19%
Short-Term Rating Definition Coverage 3 IB Services 4
Stock price expected to rise within three months from the time the rating was assigned because of a specific
BuyRequired Disclosures (continued)
Company Name Reuters 12-month rating Short-term rating Price Price date
Arteris ARTR3.SA Neutral (UR) N/A R$10.01 20 Jun 2016
CCR 20a CCRO3.SA Neutral (CBE) N/A R$16.28 20 Jun 2016
Ecorodovias 20a ECOR3.SA Neutral (CBE) N/A R$8.06 20 Jun 2016
Iochpe-Maxion 7 MYPK3.SA Neutral N/A R$14.63 20 Jun 2016
Mahle Metal Leve LEVE3.SA Neutral N/A R$23.71 20 Jun 2016
Marcopolo POMO4.SA Buy N/A R$2.27 20 Jun 2016
Randon RAPT4.SA Neutral N/A R$2.95 20 Jun 2016
Rumo 20b RUMO3.SA Buy (CBE) N/A R$4.67 20 Jun 2016
Tupy TUPY3.SA Buy N/A R$12.83 20 Jun 2016
Source: UBS. All prices as of local market close.
Ratings in this table are the most current published ratings prior to this report. They may be more recent than the stock pricing date
7.Within the past 12 months, UBS Securities LLC and/or its affiliates have received compensation for products and services other than investment banking services from this company/entity.
20a.Because this security exhibits higher-than-average volatility, the FSR has been set at 15% above the MRA for a Buy rating, and at -15% below the MRA for a Sell rating (compared with 6/-6% under the normal rating
system).
20b.Because UBS believes this security presents significantly higher-than-normal risk, its rating is deemed Buy if the FSR exceeds the MRA by 10% (compared with 6% under the normal rating system).
Unless otherwise indicated, please refer to the Valuation and Risk sections within the body of this report. For a complete set of disclosure statements associated with the companies discussed in this report, including
information on valuation and risk, please contact UBS Securities LLC, 1285 Avenue of Americas, New York, NY 10019, USA, Attention: Investment Research.
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