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Brazil Equity Strategy MVPs Summary

Core Content

This document outlines the Citi Research Brazil Equity Strategy MVPs (Most Valuable Picks) for June 2025, highlighting the performance of the portfolio, the rationale behind the selections, and the key factors influencing the market. The MVPs portfolio outperformed the Ibovespa index in May 2025, and the report discusses the ongoing dynamics of tax and budgetary policies, foreign investor behavior, and the relative valuation of the Brazilian stock market.

Main Views and Key Information

Market Dynamics

• Tax and Budget Debate: The IOF taxation debate has been a major topic since May 22. The Executive branch is pushing for higher tax revenues, while the Legislative branch is favoring spending cuts, creating a check and balance effect.
• Public Perception: Recent Datafolha polls show 40% of the population perceives the government negatively, 31% neutral, and 28% positive. This may lead to increased public spending ahead of the 2026 elections.
• Valuation: The Ibovespa is trading at 8.3x forward P/E, which is 1 S.D. below the historical average and lower than most peer markets, indicating it is undervalued relative to its fundamentals.

Portfolio Performance

• Performance Comparison: The MVP portfolio outperformed the Ibovespa in May 2025 (+1.9% vs -1.4%), but was down -17.9% in 2024 vs -10.5% for the Ibovespa.
• Historical Performance: The MVP portfolio has outperformed the Ibovespa in 2023 (+35.4% vs +22.3%) and 2022 (+16.6% vs +4.7%).
• Total Return: Since inception, the MVP portfolio is up 29.2% vs 19.5% for the Ibovespa.

Portfolio Changes

• Inclusions: BPAC (5% weight) and PETR4 (10% weight) were added to the portfolio. BPAC is chosen for its resilient revenue streams and potential lower impact from tax discussions. PETR4 replaces PBR due to its larger weight in the Ibovespa index.
• Exclusions: STNE, XP, and PBR were removed from the MVP portfolio due to uncertainties related to the tax environment.
• Weight Adjustments: Ecorodovias and Embraer received increased weights (10% and 5%, respectively), while SMFT was increased to 10% due to its improved valuation and liquidity.

Market Trends

• Foreign Investor Activity: Foreign investors have been net buyers of R$23.4b YTD, with 45% of the total occurring since May.
• Small Cap Outperformance: The SMALL11 index outperformed the Ibovespa by 9.6% YTD.
• Valuation Asymmetry: SMFT is trading at a PEG of 0.5x (vs. 0.7–1.0x for retailers), suggesting strong growth potential.

Portfolio Composition for June 2025

Ticker	Company Name	Primary Analyst	Citi Rating	Weight	Target Price	ETR	P/E 2025E	EV/EBITDA 2025E
POMO4.SA	Marcopolo SA	Andre Mazini, CFA	Buy	10%	R$9.88	38.0%	6.1	4.3
BPAC11.SA	Banco BTG Pactual SA	Gustavo Schroden	Buy	5%	R$40.00	3.3%	11.1	N/A
BBDC4.SA	Bradesco	Gustavo Schroden	Buy	10%	R$19.50	27.9%	7.1	N/A
HAPV3.SA	Hapvida	Leandro Bastos, CFA	Buy	5%	R$66.00	71.5%	14.0	6.2
CPLE6.SA	Copel	Joao Pimentel	Buy	10%	R$14.00	18.5%	18.2	7.4
ORVR3.SA	Orizon	Joao Pimentel	Buy	5%	R$61.00	19.0%	23.7	10.0
ECOR3.SA	Ecorodovias	Filipe Nielsen	Buy	10%	R$7.20	4.7%	6.7	3.9
ERJ.N	Embraer	Stephen Trent	Buy	5%	US$59.00	22.2%	22.6	11.0
PETR4.SA	Petrobras	Gabriel Barra	Neutral	10%	R$35.00	9.1%	2.2	2.5
VIVA3.SA	Vivara	João Pedro Soares	Buy / High Risk	10%	R$28.00	17.6%	10.6	6.8
SMFT3.SA	Smartfit	João Pedro Soares	Buy	10%	R$29.00	21.1%	19.6	7.5
KLBN11.SA	Klabin	Stefan Weskott, CFA	Buy	10%	R$28.00	58.0%	15.9	6.2

Key Risks

• Revenue Generation: High comparison base for insurance and limited room for efficiency improvements.
• Macroeconomic Conditions: Inflation and interest rates may increase financing costs.
• Execution Risks: In scaling biogas/biomethane operations, especially for Orizon.
• Pulp Prices: Fluctuations in pulp prices could impact Klabin's EBITDA.
• Import Tariffs: Higher tariffs on US-related deliveries could affect Embraer's operations.
• Economic Slowdown: Could reduce orders for Embraer's commercial and business jets.
• Projects and M&A: Uncertainty around projects and potential M&A could affect Petrobras' dividend payments.
• FX Volatility: A stronger BRL could impact Smartfit and Klabin.
• Regulatory Risks: Possible regulatory changes affecting Hapvida.
• Net Adds and Margin Execution: Uncertainty around net adds and margin/cash-flow execution for Hapvida.
• Production Capacity Utilization: Over- or under-utilization could lead to inefficiencies for Marcopolo.
• Operational Performance: Any deterioration could negatively impact Petrobras' extraordinary dividend prospects.

Conclusion

The MVP portfolio reflects a strategic balance between growth and value, with a focus on companies showing strong fundamentals and potential for re-rating. The portfolio is influenced by both bottom-up stock selection and top-down macroeconomic considerations, aiming to outperform the Ibovespa index over the long term.