First a word about the markets: don’t focus on understanding price action: it is 50% random, and in the past two months, it is more like 80% random, it makes no sense in many cases. Buy when cheap, sell when expensive. To sum it up in a not so nice way, “@@@ what other people think”. Investing is a game of arrogance. If you have done your homework, like the company, and the price drops, it is an opportunity.
Back to Afya.
This article will be more like a first look since I do not own the stock. It is a company I received from a suggestion on X.
It will hopefully give you enough information to decide if you want to give it a second look or engage in the comments - opened to all.
History
Afya is a Brazilian medical school business.
It started from one school in 1999 founded by a family of medical professionals. It then grew by acquiring more schools and opening more schools: Some early examples below:
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In 2019 it IPOed on the Nasdaq and consequently raised more capital in 2020.
On May 4, 2022, Bertelsmann, a media company, acquired 6,000,000 of our Class B common shares from the Esteves Family at a purchase price of US$26.90 per share. Then it owned approximately a 57.5% voting interest in Afya.
It is interesting to note that the shareholders who came in at the IPO and the Bertelsmann media company are still underwater on their investments.
It may be a sign of good value.
After the IPO, there was continued growth in numbers of schools and seats, as well as the entry into the online education business just before the IPO. (March 2019:
Afya Educacional is born from the merger of two brands whose purpose is the teaching of medicine: NRE, leader in medical undergraduate programs in the country, and Medcel, a brand of preparatory courses for residency programs. Afya emerges with an innovative market positioning: be a physician’s key partner throughout their career.)
Business overview
So Afya has three segments:
Undergraduate program - mostly schools
Continuing education which is to keep training medical professionals or to make them get a specialty qualification: it is very small
Medical practice solutions, like apps and software: it is very small.
But to analyse this business, the core is really undergraduate medical schools, the rest is at this stage not very relevant economically.
This is a breakdown of the undergraduate business:
It grows by opening and acquiring schools.
This business is singular because it is regulated heavily. The MEC (Education ministry) has to authorise the opening of new school seats. This is a positive for established players as they have less competition. But of course there a risk that we will cover in the risk section.
Here are the medical solutions. Seems interesting but there is no traction lately in the number of users and is a small part of the business.
The company is cash generative and acquired many assets in all categories since the IPO.
It was able to grow revenue very well and profit enormously. Note that there was cash injections from the IPO and subsequent capital raise, and that the Brazilian Real lost over half its value over the period.
The shares outstanding since IPO have been mostly stable, according to Koyfin.
The company has been cash generative, acquiring companies very aggressively, while maintaining leverage quite small.
Market.
Sources expect Brazil to nearly double the number of physicians in 10 years. This shows some growth ahead.
I have my doubt that this growth is sustainable past this and that Brazil has a market for that many doctors by 2035. However, there will always be free tickets to Europe and the USA or the middle east for qualified doctors so the market remains attractive in the long term. Europe in Particular has a deficit of physicians and an aging population.
Strategy
It’s pretty straightforward: Grow number of schools and seats, while also building a health-tech segment it can introduce to its network of students and professionals.
I am not impressed by the decrease in active users of the health-tech segment. Either we are very early in the strategy, or this is simply not a great business.
Management
CEO: Virgilio Deloy Capobianco Gibbon.
Virgilio Deloy Capobianco Gibbon serves as the Chief Executive Officer of Afya, a position he has held since 2016. Under his leadership, Afya successfully executed its Initial Public Offering on the Nasdaq in 2019. Since the IPO, the company has experienced significant growth, expanding its operations and solidifying its position as a leader in medical education in Brazil.
I must say that I view this CEO favorably with a good track record of M&A and the IPO.
Risks
Refinancing risk
Brazil has a very high interest rate, and Afya will need to refinance low rate debt with high rate debt in 2026, causing their future average cost of debt going from 12.7% to 14.4%.
in the mid term, I expect Brazil interest rates to normalise lower.
Tax increase :
Afya will be subjected to large tax increases
This will increase taxes by 110 million Reais on an annual basis. But despite the increases in taxes, the profit is still growing in 2025.
Risk of Increased competition:
The MEC limitations on new places opened are being challenged. Should it become easier to open medical schools seats, the pricing power will become challenged. However it is estimated that the demand is still strong for medical courses.
As of May 9, 2024, the Attorney General’s Office (Advocacia-Geral da União, or AG U) reported that MEC had 206 requests for new courses or increase in the number of medicine seats under analysis, of which 11 proceedings were already suspended pursuant to court decisions, resulting in a total of 195 proceedings pending review.
As a result of the foregoing, our revenues and profitability may decrease. We cannot assure you that we will be able to compete successfully against our current or future competitors.
Valuation
We are at less than 10 times earnings and analysts are predicting a good growth in EPS despite the tax and interest expenses increase.
The ROIC is not that great for such a high cost of capital business:
Conclusion
It is undeniably cheap at just under 10 times estimated earnings, and this is without a doubt caused by the current low valuations in the Brazilian Market.
This is an exciting growth story, and the company acquisition strategy works well in the main business, and it’s planned to grow EPS at least by 10% a year for the next two years.
The leverage is now under 1x Ebitda, leaving more room for M&A.
The Medical practice solution (Tech) business is not showing traction (yet?).
I don’t really like regulated markets like this, especially in countries like Brazil.
Therefore, it becomes a pretty complicated investment case compared to other stocks that I reviewed in Brazil such as the asset managers Vinci and Patria, but it remains interesting and it should do well from there.
I like E-commerce, consumer goods and asset managers better. I covered many of such stocks in the premium section of the newsletter.
I am looking forward to the discussion.
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Note: this is not financial advice, but my opinion on the company. Anyone should do their own due diligence to confirm a company thesis presented and form their independent opinion.
Medical seats had limited supply in Brazil, meaning this was an outstanding business: had limited competition, the best credit risk clients (generally whoever studies medicine in Brazil come from wealthier families), and the lowest churn amongst majors. But more recently there was a regulator push opening new seats, so the moat was eroded. There’s still value, but no historical analysis is comprehensive given the new game board.
I ought to buy a couple Brazil names in a separate account and forget about them for 5 years.