Car Rentals: Tax reform: FCF upside, achievable pass-through; upgrade Movida to Buy

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Car Rentals: Tax reform: FCF upside, achievable pass-through; upgrade Movida to Buy

The key change in our framework is that Brazil’s VAT reform affects earnings and cash

flow differently. Higher long-term taxes on Seminovos sales pressure EPS, but transition

rules under Complementary Law 214/2025 bring forward capex-related tax credits

relative to taxes paid on fleet demobilization, creating a temporary FCF benefit that is

not fully captured in earnings.

This makes FCF a more relevant valuation anchor, in our view, though stronger cash flow

does not automatically translate into higher value. In a spread-based framework, value

also depends on the invested capital base. For Localiza, broadly stable ROIC spreads on a

lower future capital base reduce NPV, partly offset by stronger transition cash flow.

Movida screens better, as its larger relative cash-flow benefit and lower required fare

increases narrow the profitability gap versus Localiza, more than offsetting the drag

from a lower capital base.

We also materially reduce our required fare increases (vs prior report Is the tax reform

positive for rentals?)) after removing the previously assumed 6pp ICMS purchase

advantage for fleet buyers versus retail. We now estimate Localiza would need to raise

fares by ~9% in Rent-a-Car and ~5% in Fleet Rental, down from 27% and 15%

previously. Our prior framework assumed fleet buyers paid an effective 12% ICMS

versus 18% at retail. However, under Convênio ICMS 50/99, combined with Convênio

ICMS 51/00, states reduced the calculation base for new vehicles, bringing the effective

retail burden closer to ~12% despite nominal rates of 17-20%. In addition, because

ICMS is levied on a tax-inclusive basis, the 28% headline VAT rate translates into an