A Closer Look at the Tax Reform's Implications

Key Conclusions

 On July 13, Deputy Celso Sabino (Brazil’s tax reform rapporteur) published a revised version of the income tax reform bill originally sent to Congress on June 25. We believe that this new version has a greater chance of being approved and will likely be voted on in the Lower House A Closer Look at after the August recess.  We believe that the new proposal favors growth over yield. In this report, we analyze the implications of the revised proposal for companies and investors.

 The tax reform is mostly positive for companies, given the positive impact of the reduced the Tax Reform’s income tax rate, which would be only partially offset by the end of the interest-on-equity (IoE) tax benefit.

 The Health Care, Financials and Retail sectors are poised to be the main winners. For Food & Beverage, Telecom and Banks the impact would be net-negative, mostly due to the end of the Implications IoE tax benefit.  For retail investors the tax reform will be mostly negative, because they will be obligated to pay a 20% dividend tax if the reform is approved; currently, retail investors do not pay taxes July 26, 2021 on dividends. Dividends are already incorporated into the performance of institutional investors, who pay capital gains taxes on them.

Strategy Team 1

Marcelo Sa, CNPI Matheus Marques +55-11-3073-3011 +55-11-3073-3255 1 [email protected] matheus. [email protected] Our Views on the Rapporteur’s Tax Reform Proposal

Key takeaways: i) greater reduction in the income tax rate; ii) dividend Dividend taxation versus corporate taxes: The dividend taxation and the taxation provision retained; iii) interest-on-equity tax benefit still eliminated. reduction in corporate taxes would better align Brazil with global standards.

 Greater income tax reduction: the rapporteur proposed a 10% reduction of the income tax rate 55 in 2022 (from 2.5% in the original bill) and a 12.5% cut from 2023 onward (from 5% in the original 50 IRE bill). 45 KOR  Dividends: The new proposal retains the originally proposed 20% dividend tax and the DEN 40 elimination of the IoE tax benefit. UK CAD 35 ISR CLP BEL FRA  Removal of the dividend tax at the subsidiary level. Dividend taxes would not have to be SWE US 30 FIN NOK collected from subsidiaries if the dividends were paid to the controlling shareholder. This is an SLO AUS GER POR important improvement from the original bill, reducing potential tax inefficiencies. Under the 25 TUR ITA NTH AUD ICE SPA original bill, the controlling shareholder would get a credit for the dividend taxes collected at the SWI LUX BRL Original Proposal 20 POL BRL New JPY

subsidiary level but could only use it to offset taxes on dividends. If the company chooses to (%) profit 15 HUN LIT Proposal MXN invest in a new project, for example, it would not be able to use the credit, increasing its overall CZK NZD taxation. In the case of minority stakes, however, dividend taxes would be collected at the 10 COP SLK subsidiary level, making this type of partnership less attractive. In our view, if this proposal is 5 GRE LAT BRL today approved, companies will be incentivized to sell their minority stakes. 0 EST

 Other notable revisions: i) removal of the provision that would establish new terms for the use of distributed on ratetax income Corporate 8 10 12 14 16 18 20 22 24 26 28 30 32 34 36 goodwill amortization; and ii) removal of the provision that would subject companies with lease- Tax rate before distribution - corporate tax (%) based revenues exceeding 50% of total revenue to the “real profit” tax regime, which would have a negative impact on malls and other commercial properties. Breakdown of the fiscal impact: The federal government estimates a greater Fiscal impact: The federal government expects a net negative impact of BRL 30 negative impact on tax collection for states and municipalities than for the billion in 2023, while Itaú’s Macro team projects it to be mostly neutral. federal government.

24 24 25 25 9 15 15 14 1 1 1

-5 -6 -1 -1 -15 -16 -10 -13 -15 -12 -18 -17 -14 -16 -22 -24 -28 -30 -30 -28 -30 Fed Govt estimates Itau estimates Fed Govt estimates Itau estimates Fed Govt estimates Itau estimates Fed Govt estimates Itau estimates

2022 2023 2022 2023

Total Individuals Corporates Subsidies Funds taxation Total Impact Fed Gov State and Municipalities

Source: Itaú BBA, Itaú Macro, OCDE 2 Analyzing the Impact on Companies

Impact on Fair Value – Most Benefited Companies

Fair value and EPS sensitivity analysis. These calculations are very 28.4% complex, as there are several factors that must be considered:

21.7% 21.4%  The negative impact of the end of the interest-on-equity benefit may offset or partially 19.2% 19.2% 18.9% 18.5% 18.5% offset the gains from the income tax reduction. We estimate a net negative impact for 18.2% 18.2% Ambev, Vivo and Banco do Brasil.

 Some utilities (discos and water utilities) will not benefit from the reduction in the income taxes, as this gain will be passed through consumer tariffs. See Slide 22.

 Companies with operations outside Brazil, such as JBS, will likely register a neutral or slightly positive impact from the reduction in the income tax rate.

 Companies with complex corporate structures – i.e., that have some of their gains taxed MBLY3 MATD3 TFCO4 CXSE3 SBFG3 AMER3 WIZS3 PNVL3 ESPA3 GMAT3 outside Brazil even though their production is in Brazil – will benefit less from the income tax reduction. Impact on Fair Value – Least Benefited Companies  Companies that are subject to the “presumed profit” tax regime or other special tax regimes will also benefit less, as they currently pay low income taxes. Companies in the Homebuilders and Education sectors will gain very little from the income tax reduction. ABEV3 CSMG3 MDIA3 SBSP3 BBAS3 VIVT3 BPAC11 MYPK3 INTB3 BIDI11

 We see a small income tax rate reduction for companies with the SUDAM/SUDENE benefit: the effective tax rate will fall to 12.13% from 15.25%. -2.0% -2.4% -2.2% -2.1%  Banking names will benefit less from the income tax reduction, given their loss of tax -3.9% credits. Moreover, banks will suffer from the end of the IoE benefit. -4.4% -5.0%  Companies that take advantage of tax incentives, such as Intelbras, will not benefit much -6.7% from the reduction in the income tax rate. -7.1%

-10.5%

Source: Itaú BBA 3 Fair Value and 2023 EPS Impact

Average Impact on Fair Value - Sector

16.0% 13.0% 12.3% 12.0% 10.7% 10.4% 8.9% 8.1% 7.7% 6.1% 5.5% 5.2% 2.1% 0.8% 0.4%

-1.4%

-5.7%

Tech

Retail

Banks

Protein

Utilities

Oil & Gas Oil &

Financials

Education

Health CareHealth

Pulp & Paper & Pulp

Agribusiness

Homebuilders

Steel & Mining & Steel

Properties

Goods

Food & Beverage & Food

Telecom & & Telecom Media Malls & Commercial & Malls

Average Impact on EPS (2023) - Sector Capital& Transportation

15.0% 14.4% 12.2% 11.4% 11.4% 9.3% 8.4% 8.0% 7.5% 6.2% 6.0% 4.9% 3.2% 1.3% 0.8%

-1.4%

-4.3%

Tech

Retail

Banks

Protein

Utilities

Oil & Gas Oil &

Financials

Education

Health CareHealth

Pulp & Paper & Pulp

Agribusiness

Homebuilders

Steel & Mining & Steel

Properties

Capital Goods Capital

Food & Beverage & Food

Transportation & Transportation

Telecom & & Telecom Media Malls & Commercial & Malls

Source: Itaú BBA 4 Analyzing the Impact for Retail Investors

Final Tax Reform Impact for Retail Investors, Including Dividend Taxation (% of Fair Value) – Companies  For retail investors the tax reform will be mostly negative, because they will be obligated to pay a 20% dividend tax if the reform is approved; currently, retail BBAS3 BRSR6 ABEV3 ABCB4 CSMG3 SANB11 CAML3 BPAN4 BEEF3 MDIA3 investors do not pay taxes on dividends. Dividends are already incorporated into the performance of institutional investors, who pay a capital gains taxes on them.

 We ran a sensitivity analysis adjusting for the negative impact of the dividend tax. The Retail, Pulp & Paper and Oil & Gas sectors are poised to be the main winners, as they have high growth and do not pay much in dividends.

 The Food & Beverage, Banking and Homebuilders sectors are likely to benefit the -18.5% least. Banking and Food & Beverage (Ambev) companies typically pay high dividends -19.6% -19.1% -19.0% -18.6% -21.8% -21.6% and interest on equity. Homebuilders pay low income taxes and are expected to pay -22.9% good dividends in the medium term. -24.8%

-30.8% Final Tax Reform Impact for Retail Investors, Including Dividend Taxation (% of Fair Value) – Sectors

6.4% 5.4% 3.5% 3.1% 2.1% 1.8% 0.6% 0.3%

-2.0% -4.7% -7.0% -7.3% -7.4% -8.3% -11.4% -18.0%

-20.2%

Tech

Retail

Banks

Protein

Utilities

Oil & Gas Oil &

Financials

Education

Health CareHealth

Pulp & Paper & Pulp

Agribusiness

Homebuilders

Steel & Mining & Steel

Properties

Goods

Food & Beverage & Food

Telecom & & Telecom Media

Malls & Commercial & Malls Transportation & Capital& Transportation Source: Itaú BBA 5 Agribusiness

Sector Overview

 The Agribusiness sector should be positively affected by the tax reform, as the 12.2% companies we cover do not make significant IoE payouts. 9.4% 10.4%

 The positive impact on SLC is likely to be the lowest in our coverage universe, as the company pays the most own-capital IoE. 0.3%

 Rumo has not paid IoE historically and should benefit the most, while the impact on Hidrovias is likely to be lower due to the SUDAM tax benefit.

-10.1%

Avg Net Income Avg Net Income Avg Impact On FV Avg NPV of Tax Final Impact to Impact (2022) Impact (2023) (New Tax Rate + End Dividends (% of FV) Shareholder of IoE Benefit) Impact on Fair Value – Companies

14.8%

10.0% 9.5% 7.3%

RAIL3 HBSA3 SMTO3 SLCE3

Source: Itaú BBA 6 Banks

Sector Overview  Banks in Brazil traditionally pay a large amount of IoE given their base of shareholder equity. The IoE benefit removal alone would eliminate ~10% of their profits.

 The lower corporate income tax rate would almost fully offset the negative IoE -1.4% -1.4% impact, for an overall sector hit of -1%. The net effect does not go positive because roughly half of the lower corporate tax rate is lost via reduced tax credit -5.2% monetization.

 Our fair value models are dividend-discount-based, so if retail investors have to pay an extra 20% tax on dividends, it removes ~20% of the value they will perceive as well. -16.6%  For the larger and liquid names, buybacks are likely to pick up as a means of returning -18.0% cash to shareholders. Buybacks reduce share count and elevate EPS or dividend per Avg Net Income Avg Net Income Avg Impact On FV Avg NPV of Tax Final Impact to share. Depending on how the reform goes, we could end up with higher EPS or higher Impact (2022) Impact (2023) (New Tax Rate + End Dividends (% of FV) Shareholder dividends per share than before. of IoE Benefit)

Impact on Fair Value – Companies

SANB11 BBDC4 BRSR6 BPAN4 ABCB4 MODL11 BIDI11 BPAC11 BBAS3

0.2%

-0.3% -0.7% -0.7% -1.0% -1.5% -2.0% -2.4%

-4.4%

Source: Itaú BBA 7 Education

Sector Overview  Higher Education companies in Brazil traditionally have the benefit of low effective tax rates, mainly as a result of cumulative losses and ProUni tax benefits. (Companies participating in the ProUni program have to offer one full scholarship for every 10.7 out- 1.1% 1.3% of-pocket students; in return, these companies receive an income tax exemption.) 0.4%

 The industry is going through a challenging period, especially in the on-campus segment. We therefore expect companies to recover from the impact of the pandemic only in the medium term, which would imply that dividend payouts are unlikely to normalize in the short term.

 Our models do not assume IoE payments going forward, except for SEER. -4.7%  All-in, from a retail investor’s perspective, we foresee the tax reform having a slightly -5.0% negative impact on the Education sector due to the effect on dividends. Avg Net Income Avg Net Income Avg Impact On FV Avg NPV of Tax Final Impact to Impact (2022) Impact (2023) (New Tax Rate + End Dividends (% of FV) Shareholder of IoE Benefit) Impact on Fair Value – Companies

1.3%

0.2% 0.0% 0.0%

SEER3 COGN3 ANIM3 YDUQ3

Source: Itaú BBA 8 Financials

Sector Overview  As neither Caixa Seguridade nor Wiz currently distribute their earnings through IoE, those companies – with their relatively high EBT margins – will benefit the most from the 16.0% tax reform (dividend taxation aside). 15.0% 9.6%  B3’s high-EBT-margin profile will likely more than offset the negative impact of the elimination of the IoE benefit, explaining the 15% positive impact we project for the company.

 The upside for Cielo is projected to be the lowest in our coverage universe, as the -2.0% company was previously helped by payment of IoE.

 We would highlight that the reform should have much less upside for retail investors than for institutional investors, mainly due to the dividend taxation element. When we -18.1% account for the NPV of the dividend taxes, the positive impact of the lower corporate Avg Net Income Avg Net Income Avg Impact On FV Avg NPV of Tax Final Impact to taxes is likely to be completely offset, particularly in the cases of CXSE3 and B3SA3. Impact (2022) Impact (2023) (New Tax Rate + End Dividends (% of FV) Shareholder of IoE Benefit) Impact on Fair Value – Companies

19.2% 18.5%

14.9% 11.5%

CXSE3 WIZS3 B3SA3 CIEL3

Source: Itaú BBA 9 Food & Beverage

Sector Overview  Ambev, M. Dias and Camil, which stand to be hurt by the withdrawal of the IoE tax benefit, could be the most negatively affected F&B names.

 Ambev could take the biggest hit in the F&B space, due to its current level of IoE -4.3% payment. The company does have a light balance sheet in terms of indebtedness, -5.7% so we see the potential for extraordinary dividend distribution to mitigate the loss -8.7% of the tax benefit provided for by the current IoE structure. Nonetheless, Ambev’s balance sheet is an important component of ABI’s debt structure and it is not -14.4% obvious that this course of action should be followed. -20.2%

Avg Net Income Avg Net Income Avg Impact On FV Avg NPV of Tax Final Impact to Impact (2022) Impact (2023) (New Tax Rate + End Dividends (% of FV) Shareholder of IoE Benefit)

Impact on Fair Value – Companies

CAML3 MDIA3 ABEV3 0.0%

-6.7%

-10.5%

Source: Itaú BBA 10 Healthcare

Sector Overview  The Healthcare sector is likely to be positively affected by the tax reform, due to: i)

the high average effective tax rate for these companies in comparison with other 11.4% 12.3% sectors (most healthcare companies traditionally do not pay a large amount of IoE – Hypera being the lone exception); and ii) the healthy growth prospects embedded in our 6.4% formal projections for these names, either organic (Blau and Hypera, for instance) or 1.8% inorganic (DASA, for instance).

 For the sake of the analysis, we are assuming that any changes in the PIS/COFINS structure for pharmaceutical companies (Blau and Hypera Pharma, namely) will be eventually passed through to prices. We are factoring in no impact from this potential item in our numbers. -10.5% Avg Net Income Avg Net Income Avg Impact On FV Avg NPV of Tax Final Impact to Impact (2022) Impact (2023) (New Tax Rate + End Dividends (% of FV) Shareholder of IoE Benefit) Impact on Fair Value – Companies

21.7%

16.0% 15.0% 14.9% 12.3% 10.9% 9.1% 6.2% 4.7%

MATD3 FLRY3 DASA3 AALR3 ODPV3 BLAU3 QUAL3 HYPE3 PARD3

Source: Itaú BBA 11 Homebuilders

Sector Overview  Homebuilders (Analystarecomment)likely to navigate the tax reform largely unscathed, given that the gains stemming from lower corporate taxes at the holding level should be minimal 0.5% 0.8% 0.8% while their subsidiaries/SPVs will continue to benefit from the special tax regime.

 We note that JHSF could see some benefit due to its diversified business platform, which encompasses malls and other recurring-revenue businesses.

 We assume that these companies will increase their dividend payouts in the medium term, when they finish the current ramp-up of launches. This explains the negative impact of the dividend taxation in our projections. -11.4% -12.2% Avg Net Income Avg Net Income Avg Impact On FV Avg NPV of Tax Final Impact to Impact (2022) Impact (2023) (New Tax Rate + End Dividends (% of FV) Shareholder of IoE Benefit) Impact on Fair Value – Companies

10.9%

2.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

LPSB3 JHSF3 EZTC3 CURY3 CYRE3 DIRR3 EVEN3 HBOR3 LAVV3 MDNE3 MELK3 MRVE3 MTRE3 PLPL3 TCSA3 TEND3

Source: Itaú BBA 12 Malls & Commercial Properties

Sector Overview  Malls & Commercial Properties should get a decent EPS boost from lower corporate taxes. In contrast to the first draft of the reform, under which stricter eligibility criteria 8.0% 7.7% 6.2% for the presumed profit tax regime could have taken a severe toll on these companies’ profitability, the revised reform should have a net positive impact on their earnings. However, we note that the benefit would be somewhat diminished due to these companies’ organizational structures.

 Multiplan should gain the least under the new proposal, as losses stemming from the -7.3% termination of the IoE tax benefit would likely more than offset the lower corporate taxes in the short term. -15.0%

12.8%

10.6% 9.6% 8.7% 7.6% 6.4% 6.4% 4.4%

2.3%

HBRE3 CCPR3 ALSO3 LOGG3 SCAR3 IGTA3 BRPR3 BRML3 MULT3

Source: Itaú BBA 13 Oil & Gas

Sector Overview

 Overall, the Oil & Gas sector would be positively affected by the tax reform. 14.4%  Most of the companies in our coverage universe have historically chosen to not pay 11.2% 12.0% IoE.

 The positive impact for 3R Petroleum and PetroRecôncavo would be more limited 3.5% due to the Sudene tax benefit; most of their operations are located in the Northeast region.

 UGPA3 is likely to benefit the least because of its leverage.

-8.5% Avg Net Income Avg Net Income Avg Impact On FV Avg NPV of Tax Final Impact to Impact (2022) Impact (2023) (New Tax Rate + End Dividends (% of FV) Shareholder of IoE Benefit)

Impact on Fair Value – Companies

18.1% 16.3% 14.7%

11.1% 10.9% 9.0%

3.6%

OPCT3 ENAT3 PETR4 RECV3 PRIO3 RRRP3 UGPA3

Source: Itaú BBA 14 Protein

Sector Overview

 JBS and Marfrig are both likely to benefit less than other players in the sector, given their high exposure to the U.S. and their low tax burden in Brazil. 4.9% 5.5% 3.3%  For Marfrig, specifically, the impact of dividend taxation would be lower than for its peers due to its higher leverage, according to our forecasts. In this case, there is less dividend payload to be taxed.

-8.3%

-13.8% Avg Net Income Avg Net Income Avg Impact On FV Avg NPV of Tax Final Impact to Impact (2022) Impact (2023) (New Tax Rate + End Dividends (% of FV) Shareholder of IoE Benefit) Impact on Fair Value – Companies

16.0%

5.9%

0.0% 0.0%

BRFS3 BEEF3 JBSS3 MRFG3

Source: Itaú BBA 15 Pulp & Paper

Sector Overview  The potential impact of the tax reform on the Brazilian Pulp & Paper companies is not easy to gauge because of the complex tax situations of Suzano and Klabin, which have foreign subsidiaries in Austria, the U.S., Switzerland, Argentina, etc., that are 11.4% 10.7% individually subject to different tax rules. 7.9%  As of today, Suzano’s and Klabin’s effective cash tax rates are significantly lower than 5.4% the statutory 34%, because of i) tax loss carryforwards, ii) their operations in areas with tax benefits, and iii) for Suzano, the goodwill amortization from the Fibria acquisition – among other factors.

 Suzano has not paid IoE in recent years (and neither had Fibria before the M&A transaction), as the tax benefits would have been minimal. -5.3%  The future cash tax rates forecasted in our official models for Suzano and Klabin increase significantly over time as some of the above-listed fiscal benefits are used Avg Net Income Avg Net Income Avg Impact On FV Avg NPV of Tax Final Impact to up. As a result, lower income tax rates could help these companies maintain relatively Impact (2022) Impact (2023) (New Tax Rate + End Dividends (% of FV) Shareholder low tax expenses. of IoE Benefit) Impact on Fair Value – Companies

10.8% 10.6%

KLBN11 SUZB3

Source: Itaú BBA 16 Retail

Sector Overview  Retail companies don’t usually have very high dividend payout ratios, so the benefit of the IoE payment has been limited for these companies. Therefore, the tax reform 13.0% would end up being positive for the sector. 9.3%

 In the sensitivity analysis below, it’s notable that the companies in line for the most 5.6% 6.4% positive fair-value impact are the ones in whose current models we have not incorporated IoE benefits – such as MBLY3 and TFCO4, among others. In these cases, there is no downside from the end of the IoE benefit that offsets the gains from the lower tax rate.

 Finally, we note that in the specific case of NTCO3, we are also considering the impact of the end of single-phase PIS/COFINS. -6.6%

28.4%

21.4% 19.2% 18.9% 18.5% 18.2% 18.2% 16.7% 15.6% 15.4% 15.4% 15.2% 15.0% 14.3% 11.1% 11.0% 10.0% 8.8% 8.0% 7.7% 5.9% 2.2%

-1.7% -2.1%

ASAI3

INTB3

VIVA3

SBFG3 PETZ3

ESPA3

CRFB3

LREN3

ALLD3

BKBR3

LJQQ3

PNVL3

ARZZ3

PCAR3

RADL3

TFCO4

VVAR3

MBLY3

GUAR3

NTCO3

MEAL3

AMER3

PGMN3 GMAT3

Source: Itaú BBA 17 Steel & Mining

Sector Overview  The impact of the tax reform on the Brazilian Steel & Mining sector will vary significantly from company to company, depending on the proportion of their results 6.2% generated in Brazil as opposed to by foreign subsidiaries. 4.8% 5.2%  One legacy of the sector’s difficult period of 2014-19 is that most of these companies have fiscal benefits related to tax loss carryforwards. 0.6%  Aura, Gerdau, Usiminas and CSN have historically paid limited IoE, as the fiscal benefits of doing so were not significant. Vale, on the other hand, has historically tried to maximize its tax benefit by paying IoE close to the maximum deductible limit.

 Given the expected short-term increase in effective tax rates over the next few years and their recent strong operating performance, CSN and Vale would be the relative -4.6% winners of a reduction in tax rates in the sector. Avg Net Income Avg Net Income Avg Impact On FV Avg NPV of Tax Final Impact to Impact (2022) Impact (2023) (New Tax Rate + End Dividends (% of FV) Shareholder of IoE Benefit) Impact on Fair Value – Companies

9.8%

7.7%

3.6% 2.5% 2.2%

CSNA3 VALE3 USIM5 AURA33 GGBR4

Source: Itaú BBA 18 Tech

Sector Overview

 We expect the corporate tax reduction to benefit Mosaico and Dotz, as neither 8.9% company distributes its earnings through IoE. From a retail investor’s perspective, because both companies are still in the stage of investing in their operations and are 6.0% unlikely to offer high payout ratios, the impact of dividend taxation is relatively low. 2.8% 3.1%  For Totvs, we expect a negative impact stemming from the withdrawal of the IoE tax benefit, though the company should conversely benefit from the lower corporate income tax rate going forward. We also note that Totvs has a lower income tax rate given its tax incentives from Lei do Bem/Lei da Informática.

-5.8% Avg Net Income Avg Net Income Avg Impact On FV Avg NPV of Tax Final Impact to Impact (2022) Impact (2023) (New Tax Rate + End Dividends (% of FV) Shareholder of IoE Benefit) Impact on Fair Value – Companies

13.6%

10.4% 9.1% 9.0% 7.9%

3.5%

MOSI3 DOTZ3 LWSA3 IFCM3 BMOB3 TOTS3

Source: Itaú BBA 19 Telecom & Media

Sector Overview  Vivo: The new tax proposal will affect the company negatively. The company’s 2.8% 3.2% effective tax rate in 2020a was close to 20%. With the elimination of the IoE benefit, its 2.1% effective tax rate would be closer to 25%. We are already assuming a 23% effective tax rate in our figures, so the EPS impact is partly priced in.

 The company would likely look to optimize its cost of capital through higher leverage, and regarding the taxes on dividends, increasing share buybacks could be a way to offset the negative effects, in our view.

 Eletromidia does not make use of IoE payments. Given the lower effective tax rate it would pay and its high-growth profile, we believe that the new tax proposal would be a -7.4% net positive for Eletromidia, albeit one partially offset by a slightly higher cost of capital. -9.6%

8.2%

-3.9% ELMD3 VIVT3

Source: Itaú BBA 20 Transportation & Capital Goods

Sector Overview  While Transportation & Logistics names should benefit under the new proposal, we estimate that the impact on the Capital Goods sector would be more limited, for 8.4% 8.1% three main reasons:

 A significant portion of their operations are overseas. Names such as Iochpe, 3.0% Marcopolo, WEG and Tupy manufacture and sell a considerable portion of their 2.1% goods abroad, which limits the benefit of a lower domestic tax rate.

 Interest on equity does not pay a key role. The cash generated from these players’ operations goes mainly to capex for maintaining or expanding their capacity, while for some companies M&A is also a important piece of the puzzle. -6.1%  Already having a low effective tax rate limits the positive effect of the proposed tax reform. This mainly pertains to WEG. Avg Net Income Avg Net Income Avg Impact On FV Avg NPV of Tax Final Impact to Impact (2022) Impact (2023) (New Tax Rate + End Dividends (% of FV) Shareholder of IoE Benefit) Impact on Fair Value – Companies

17.6% 16.6% 15.0%

11.1% 10.6% 9.2% 8.8% 8.8% 8.3% 8.0% 7.9% 6.5% 3.4% 1.4%

-0.8% -2.2% LOGN3 CCRO3 TGMA3 RAPT4 GOLL4 STBP3 SEQL3 JSLG3 VAMO3 SIMH3 GGPS3 AZUL4 WEGE3 POMO4 TUPY3 MYPK3

Source: Itaú BBA 21 Utilities

Sector Overview  The disco puzzle. The reduction in income tax is likely to be neutral for companies operating at the regulatory level and paying a 34% rate. For companies that have the 7.5% 6.1% SUDAM/SUDENE tax benefit, however, the impact is likely to be negative. This is one of 4.8% the reasons that the projected impact of the tax reform is less positive for Equatorial and Neoenergia than for other utilities.  Gencos and transcos. The impact of the tax reform on gencos and transcos is likely to be positive, but the magnitude of the effect will vary. Companies under the presumed profit tax regime or utilizing the SUDAM/SUDENE tax benefit will be less favored due to their lower effective tax rate. -7.0%  The Sanitation sector would be negatively affected by this reform. Sanitation companies currently pay IoE, and given their regulatory tariff model, the income tax reduction is likely to be passed through to consumer tariffs. -13.0% Avg Net Income Avg Net Income Avg Impact On FV Avg NPV of Tax Final Impact to  From the retail investor’s perspective, the reform should be net-negative for most of Impact (2022) Impact (2023) (New Tax Rate + End Dividends (% of FV) Shareholder these names because they currently pay no taxes on dividends. Utilities is one of the of IoE Benefit) sectors most exposed to dividend taxation.

Impact on Fair Value – Companies: Positive impact on EPS and fair values. The positive impact of the 12.5% reduction in income tax will be partially offset by the negative impact of the end of the IoE tax benefit.

14.4% 13.5% 12.8% 12.0% 11.6% 11.6% 11.0% 9.2% 8.1% 7.2% 6.8% 5.5% 3.8% 3.3% 2.1% 1.7% 0.9%

-1.4% -5.0% -7.1% ENBR3 TRPL4 ALUP11 CPFE3 TAEE11 CPLE6 CMIG4 EGIE3 LIGT3 ELET3 AESB3 ENEV3 ENGI11 OMGE3 NEOE3 CESP6 EQTL3 SAPR11 SBSP3 CSMG3

Source: Itaú BBA 22 Appendix

NPV of Final Impact for Post Tax Reform NPV of Dividend Sector Ticker Current FV Impact On FV (a) Dividend Taxes Shareholder FV Tax per Share (% of FV) (b) (a+b=c) Agribusiness HBSA3 10.00 11.00 10.0% 1.52 -15.2% -5.2% Agribusiness RAIL3 27.00 31.00 14.8% 2.33 -8.6% 6.2% Agribusiness SLCE3 55.00 59.00 7.3% 4.61 -8.4% -1.1% Agribusiness SMTO3 42.00 46.00 9.5% 3.39 -8.1% 1.5% Banks ABCB4 20.00 19.80 -1.0% 4.15 -20.8% -21.8% Banks BBAS3 36.00 34.40 -4.4% 9.50 -26.4% -30.8% Banks BBDC4 31.00 30.90 -0.3% 5.56 -17.9% -18.2% Banks BIDI11 91.00 89.20 -2.0% 8.02 -8.8% -10.8% Banks BPAC11 37.60 36.70 -2.4% 2.87 -7.6% -10.0% Banks BPAN4 27.00 26.80 -0.7% 4.93 -18.3% -19.0% Banks BRSR6 15.00 14.90 -0.7% 3.62 -24.2% -24.8% Banks MODL11 27.00 26.60 -1.5% 1.54 -5.7% -7.2% Banks SANB11 45.00 45.10 0.2% 8.94 -19.9% -19.6% Education ANIM3 19.26 19.26 0.0% 1.20 -6.2% -6.2% Education COGN3 5.55 5.56 0.2% 0.08 -1.5% -1.3% Education SEER3 21.96 22.24 1.3% 1.66 -7.6% -6.3% Education YDUQ3 45.35 45.35 0.0% 2.21 -4.9% -4.9% Financials B3SA3 21.59 24.81 14.9% 3.64 -16.8% -2.0% Financials CIEL3 5.25 5.85 11.5% 0.94 -18.0% -6.5% Financials CXSE3 16.30 19.44 19.2% 4.08 -25.0% -5.8% Financials DOTZ3 22.06 24.36 10.4% 0.82 -3.7% 6.7% Financials MOSI3 38.52 43.77 13.6% 1.48 -3.8% 9.8% Financials WIZS3 22.98 27.24 18.5% 2.87 -12.5% 6.1%

Source: Itaú BBA 23 Appendix

NPV of Final Impact for Post Tax Reform NPV of Dividend Sector Ticker Current FV Impact On FV (a) Dividend Taxes Shareholder FV Tax per Share (% of FV) (b) (a+b=c) Food & Beverage ABEV3 19.00 17.00 -10.5% 2.35 -12.4% -22.9% Food & Beverage CAML3 14.00 14.00 0.0% 2.67 -19.1% -19.1% Food & Beverage MDIA3 30.00 28.00 -6.7% 3.55 -11.8% -18.5% Health Care AALR3 15.04 17.28 14.9% 0.81 -5.4% 9.5% Health Care BLAU3 68.09 75.52 10.9% 10.38 -15.2% -4.3% Health Care DASA3 81.22 93.40 15.0% 7.01 -8.6% 6.4% Health Care FLRY3 28.96 33.59 16.0% 3.85 -13.3% 2.7% Health Care HYPE3 40.56 43.06 6.2% 4.89 -12.1% -5.9% Health Care MATD3 22.50 27.39 21.7% 1.15 -5.1% 16.6% Health Care ODPV3 14.34 16.11 12.3% 2.06 -14.3% -2.1% Health Care PARD3 26.31 27.55 4.7% 0.89 -3.4% 1.3% Health Care QUAL3 39.27 42.85 9.1% 6.76 -17.2% -8.1% Homebuilders CURY3 15.30 15.30 0.0% 1.75 -11.4% -11.4% Homebuilders CYRE3 34.80 34.80 0.0% 3.94 -11.3% -11.3% Homebuilders DIRR3 19.70 19.70 0.0% 2.68 -13.6% -13.6% Homebuilders EVEN3 14.30 14.30 0.0% 1.82 -12.8% -12.8% Homebuilders EZTC3 48.00 48.00 0.0% 5.49 -11.4% -11.4% Homebuilders HBOR3 13.50 13.50 0.0% 1.64 -12.1% -12.1% Homebuilders JHSF3 10.10 10.30 2.0% 1.02 -10.1% -8.2% Homebuilders LAVV3 12.20 12.20 0.0% 1.57 -12.8% -12.8% Homebuilders LPSB3 4.60 5.10 10.9% 0.25 -5.5% 5.4% Homebuilders MDNE3 18.00 18.00 0.0% 2.21 -12.3% -12.3% Homebuilders MELK3 11.40 11.40 0.0% 1.54 -13.5% -13.5% Homebuilders MRVE3 20.20 20.20 0.0% 3.28 -16.3% -16.3%

Source: Itaú BBA 24 Appendix

NPV of Final Impact for Post Tax Reform NPV of Dividend Sector Ticker Current FV Impact On FV (a) Dividend Taxes Shareholder FV Tax per Share (% of FV) (b) (a+b=c) Homebuilders MTRE3 18.50 18.50 0.0% 2.62 -14.1% -14.1% Homebuilders PLPL3 12.90 12.90 0.0% 1.22 -9.5% -9.5% Homebuilders TCSA3 9.40 9.40 0.0% 1.35 -14.4% -14.4% Homebuilders TEND3 40.10 40.10 0.0% 5.35 -13.3% -13.3% Malls & Commercial Properties ALSO3 36.30 39.80 9.6% 4.87 -13.4% -3.8% Malls & Commercial Properties BRML3 11.40 11.90 4.4% 1.82 -15.9% -11.5% Malls & Commercial Properties BRPR3 10.90 11.60 6.4% 1.94 -17.8% -11.3% Malls & Commercial Properties CCPR3 15.10 16.70 10.6% 2.66 -17.6% -7.0% Malls & Commercial Properties HBRE3 34.30 38.70 12.8% 10.42 -30.4% -17.5% Malls & Commercial Properties IGTA3 48.20 51.30 6.4% 6.14 -12.7% -6.3% Malls & Commercial Properties LOGG3 40.20 43.70 8.7% 3.15 -7.8% 0.9% Malls & Commercial Properties MULT3 30.80 31.50 2.3% 3.40 -11.0% -8.8% Malls & Commercial Properties SCAR3 42.10 45.30 7.6% 3.42 -8.1% -0.5% Oil & Gas ENAT3 12.99 15.10 16.3% 1.59 -12.2% 4.0% Oil & Gas OPCT3 16.00 18.90 18.1% 1.47 -9.2% 8.9% Oil & Gas PETR4 38.00 43.60 14.7% 5.44 -14.3% 0.4% Oil & Gas PRIO3 22.00 24.40 10.9% 1.22 -5.5% 5.4% Oil & Gas RECV3 25.11 27.90 11.1% 1.57 -6.3% 4.8% Oil & Gas RRRP3 61.00 66.50 9.0% 2.64 -4.3% 4.7% Oil & Gas UGPA3 26.00 26.93 3.6% 1.93 -7.4% -3.8% Protein BEEF3 17.00 18.00 5.9% 4.16 -24.5% -18.6% Protein BRFS3 25.00 29.00 16.0% 3.30 -13.2% 2.8% Protein JBSS3 47.00 47.00 0.0% 6.86 -14.6% -14.6% Protein MRFG3 26.00 26.00 0.0% 0.71 -2.7% -2.7%

Source: Itaú BBA 25 Appendix

NPV of Final Impact for Post Tax Reform NPV of Dividend Sector Ticker Current FV Impact On FV (a) Dividend Taxes Shareholder FV Tax per Share (% of FV) (b) (a+b=c) Pulp & Paper KLBN11 37.00 41.00 10.8% 2.70 -7.3% 3.5% Pulp & Paper SUZB3 85.00 94.00 10.6% 2.73 -3.2% 7.4% Retail ALLD3 32.00 37.00 15.6% 4.07 -12.7% 2.9% Retail ARZZ3 81.00 90.00 11.1% 3.65 -4.5% 6.6% Retail ASAI3 100.00 111.00 11.0% 6.50 -6.5% 4.5% Retail BKBR3 13.00 15.00 15.4% 0.00 0.0% 15.4% Retail AMER3 77.40 92.00 18.9% 2.83 -3.7% 15.2% Retail CRFB3 30.00 33.00 10.0% 2.87 -9.6% 0.4% Retail ESPA3 22.00 26.00 18.2% 1.13 -5.1% 13.0% Retail GMAT3 11.00 13.00 18.2% 0.48 -4.4% 13.8% Retail GUAR3 25.00 27.00 8.0% 1.33 -5.3% 2.7% Retail LJQQ3 18.00 21.00 16.7% 2.79 -15.5% 1.2% Retail LREN3 51.00 54.00 5.9% 2.36 -4.6% 1.3% Retail MBLY3 27.80 35.70 28.4% 1.18 -4.3% 24.2% Retail MEAL3 4.50 4.60 2.2% 0.00 0.0% 2.2% Retail NTCO3 58.00 57.00 -1.7% 1.92 -3.3% -5.0% Retail PCAR3 39.00 42.00 7.7% 1.02 -2.6% 5.1% Retail PETZ3 26.00 30.00 15.4% 2.79 -10.7% 4.6% Retail PGMN3 16.32 18.77 15.0% 1.56 -9.6% 5.4% Retail PNVL3 27.00 32.00 18.5% 3.46 -12.8% 5.7% Retail RADL3 28.00 32.00 14.3% 2.68 -9.6% 4.7% Retail SBFG3 26.00 31.00 19.2% 1.21 -4.7% 14.6% Retail TFCO4 14.00 17.00 21.4% 0.64 -4.6% 16.9% Retail VIVA3 34.00 37.00 8.8% 2.15 -6.3% 2.5% Retail VVAR3 16.50 19.00 15.2% 0.73 -4.4% 10.7%

Source: Itaú BBA 26 Appendix

NPV of Final Impact for Post Tax Reform NPV of Dividend Sector Ticker Current FV Impact On FV (a) Dividend Taxes Shareholder FV Tax per Share (% of FV) (b) (a+b=c) Steel & Mining AURA33 80.00 82.00 2.5% 0.73 -0.9% 1.6% Steel & Mining CSNA3 61.00 67.00 9.8% 2.87 -4.7% 5.1% Steel & Mining GGBR4 45.00 46.00 2.2% 2.43 -5.4% -3.2% Steel & Mining USIM5 28.00 29.00 3.6% 1.18 -4.2% -0.7% Steel & Mining VALE3 26.00 28.00 7.7% 1.95 -7.5% 0.2% Tech BMOB3 29.20 31.50 7.9% 2.19 -7.5% 0.4% Tech IFCM3 27.90 30.40 9.0% 1.95 -7.0% 2.0% Tech INTB3 28.10 27.50 -2.1% 3.57 -12.7% -14.8% Tech LWSA3 33.10 36.10 9.1% 1.18 -3.6% 5.5% Tech SEQL3 36.40 39.60 8.8% 3.27 -9.0% -0.2% Tech TOTS3 43.40 44.90 3.5% 3.91 -9.0% -5.6% Telecom & Media ELMD3 24.50 26.50 8.2% 1.75 -7.1% 1.0% Telecom & Media VIVT3 45.00 43.25 -3.9% 5.38 -12.0% -15.8% Transportation & Capital Goods AZUL4 40.96 43.61 6.5% 0.00 0.0% 6.5% Transportation & Capital Goods CCRO3 16.50 19.25 16.6% 1.84 -11.1% 5.5% Transportation & Capital Goods GGPS3 23.00 24.83 7.9% 2.05 -8.9% -1.0% Transportation & Capital Goods GOLL4 24.46 27.05 10.6% 0.00 0.0% 10.6% Transportation & Capital Goods JSLG3 15.00 16.31 8.8% 0.39 -2.6% 6.2% Transportation & Capital Goods LOGN3 22.00 25.88 17.6% 1.40 -6.4% 11.3% Transportation & Capital Goods MYPK3 19.00 18.58 -2.2% 0.88 -4.6% -6.8% Transportation & Capital Goods POMO4 3.20 3.24 1.4% 0.26 -8.0% -6.6% Transportation & Capital Goods RAPT4 18.50 20.55 11.1% 0.68 -3.7% 7.4% Transportation & Capital Goods SIMH3 51.50 55.61 8.0% 0.00 0.0% 8.0% Transportation & Capital Goods STBP3 9.00 9.83 9.2% 0.95 -10.5% -1.3% Transportation & Capital Goods TGMA3 33.00 37.95 15.0% 5.23 -15.9% -0.9%

Source: Itaú BBA 27 Appendix

NPV of Final Impact for Post Tax Reform NPV of Dividend Sector Ticker Current FV Impact On FV (a) Dividend Taxes Shareholder FV Tax per Share (% of FV) (b) (a+b=c) Transportation & Capital Goods TUPY3 35.00 34.72 -0.8% 3.62 -10.4% -11.2% Transportation & Capital Goods VAMO3 61.50 66.59 8.3% 2.25 -3.7% 4.6% Transportation & Capital Goods WEGE3 46.00 47.56 3.4% 1.02 -2.2% 1.2% Utilities AESB3 17.15 18.31 6.8% 3.14 -18.3% -11.5% Utilities ALUP11 34.84 39.29 12.8% 3.84 -11.0% 1.7% Utilities CESP6 38.44 39.11 1.7% 4.09 -10.6% -8.9% Utilities CMIG4 13.43 14.90 11.0% 1.94 -14.5% -3.5% Utilities CPFE3 37.12 41.57 12.0% 6.59 -17.8% -5.8% Utilities CPLE6 7.41 8.27 11.6% 1.30 -17.6% -6.0% Utilities CSMG3 56.98 52.91 -7.1% 8.24 -14.5% -21.6% Utilities EGIE3 49.08 53.58 9.2% 8.79 -17.9% -8.7% Utilities ELET3 52.85 56.67 7.2% 4.63 -8.8% -1.5% Utilities ENBR3 22.00 25.17 14.4% 4.75 -21.6% -7.2% Utilities ENEV3 59.81 63.09 5.5% 0.00 0.0% 5.5% Utilities ENGI11 65.17 67.64 3.8% 8.42 -12.9% -9.1% Utilities EQTL3 26.07 26.30 0.9% 3.60 -13.8% -12.9% Utilities LIGT3 20.78 22.47 8.1% 1.36 -6.5% 1.6% Utilities NEOE3 27.15 27.71 2.1% 4.96 -18.3% -16.2% Utilities OMGE3 44.24 45.72 3.3% 3.91 -8.8% -5.5% Utilities SAPR11 119.42 117.75 -1.4% 12.60 -10.5% -12.0% Utilities SBSP3 65.27 61.98 -5.0% 5.14 -7.9% -12.9% Utilities TAEE11 36.67 40.93 11.6% 4.60 -12.5% -0.9% Utilities TRPL4 28.17 31.96 13.5% 4.80 -17.0% -3.6%

Source: Itaú BBA 28 Disclaimer

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