Citi arrives at its R$5/share target price on Armac based on a 15-year FCFE DCF valuation. Our assumtions consider (1) short-term challenges related to yield expansion and utilization improvement, (2) short-term capex much lower than historically, (3) well-shaped balance sheet supporting lower cost of debt versus its peers and (4) interest on capital payouts supporting lower effective tax rage. Our cost of equity of 19.1% reflects Brazil’s currentl long-term interest rates leve and currently lower leverage. This valuation represents a 2025E P/E multiple of 9.8x, based on our target price.

We rate Armac High Risk due to its lower stock liquidity and elevated stock volatility.
Risks to our target price include: 
(1) We could be underestimating / overestimating macroeconomic impacts over Armac's ability to increase rental yields and/or improve fleet utilization, depending on how interest rates will evolve and how the economy will respond.
(2) It's possible that aggressive competition is bigger (or smaller) than our expectations, driving negative (or positive) impacts over rental yields and fleet growth.
(3) Lower-than-expected residual value of the sold assets may have impacts over expected long-term return on capital.
(4) Government incentives for new platform/machine purchases can deteriorate the rent vs. buy decision from clients, creating downside risk for the company's pricing strategy and assets residual value.
(5) Changes in relationships with original equipment manufacturers (OEMs) could lead to deterioration in purchasing conditions, especially in comparison to rivals.
(6) Maintenance costs may increase as Armac's fleet ages, or if the company finds challenges to hire and retain specialized personnel.