Afya (NASDAQ:AFYA) has been connected a tally since I past covered the banal (see here and here), benefiting from a beardown 4th and affirmative quality travel contempt the inflationary headwinds. A caller 6-K filing seems to person flown nether the radar but is worthy noting – Brazil’s Ministry of Education has granted Afya authorization to adhd 64 aesculapian seats for its Itabuna-based aesculapian assemblage FASA (Faculdade Santo Agostinho). This isn’t a game-changer but it entails an further ~R$141m to Afya's worth utilizing the implied per-seat valuation of the UNIT Alagoas/FITS Jaboatão deal, which isn’t insignificant.
Meanwhile, the fundamentals aren’t atrocious either – Afya’s halfway undergrad aesculapian acquisition concern continues to outperform, portion specialization courses are seeing a affirmative betterment arsenic well. Together, these concern segments should much than offset the competitory challenges successful integer services. Afya banal trades beneath peers Cogna Educação (OTCPK:COGNY) and Anima (OTC:ANNMF) connected FY24 net estimates, contempt maintaining a little risk/leverage profile; net, I stay bullish here.
FASA Gets 64 More Medical Seats
Afya closed retired 2022 with much bully news, filing a disclosure that the institution had been authorized to adhd 64 aesculapian seats to its FASA aesculapian assemblage successful Itabuna city, Bahia. This was a agelong clip coming - callback that the licence was archetypal awarded arsenic portion of the 2014 'Mais Medicos' programme to code shortages of doctors crossed the country's interior and metropolis outskirts. The archetypal allocation was for 85 seats, with an enactment to adhd different 100 seats. With the latest support of 64 seats, Afya present has a full of 149 authorized seats astatine the installation and 36 remaining successful its allocation. In aggregate, Afya volition person monolithic standard successful its aesculapian concern post-deal, with 2.8k of approved spot capacity, reinforcing its presumption arsenic the largest aesculapian subordinate successful Brazil.
The enlargement apt came arsenic a affirmative astonishment to investors - it has been a agelong clip since the past support astatine FASA and should pb to upward net revisions heading into the Q4/FY22 results. The astir apt script is for these seats to travel into cognition successful aboriginal 2023, successful my view; I americium penciling successful Q2 arsenic the basal lawsuit for now. Given the profitability of FASA seats, the valuation accusation is apt affirmative arsenic well. Using comps from Afya‘s astir caller UNIT Alagoas/FITS Jaboatão transaction of R$2.2m/seat would connote ~R$141m of incremental marketplace value.
On Track for a Top-Line Beat successful FY22
Coming disconnected a beardown Q3, Afya looks poised to outperform an unchanged FY22 guidance bar. Organic maturation astatine the halfway aesculapian undergrad concern remains the cardinal item (overall +9.2% YoY summation successful summons ex-acquisitions), complemented by a continued acquisition concern that besides outpaced inflation. Digital is the lone blemish for Afya - heightened contention successful cardinal residency prep courses Medcel has weighed connected gross growth, resulting successful a disappointing +1.3% YoY ex-acquisitions connected a YTD basis.
While the steep -23% YoY diminution (flat QoQ) successful the prep people pupil basal is concerning, determination is anticipation of a betterment successful Q4, fixed the H2 intake typically starts successful the 4th quarter. And with YTD gross from specialization courses already up by ~47% YoY, recovering from a COVID-driven antagonistic inclination (due to applicable people interruptions), momentum is connected Afya’s side. Also helping successful the near-term volition beryllium the displacement towards aesculapian grad courses (via IPEMED) and distant from different underperforming acquired operations, which should boost wide pricing. All successful all, the reiterated FY22 adj gross guidance scope of R$2.28bn-R$2.36bn seems good wrong reach, peculiarly having already achieved three-quarters of the guidance mid-point YTD.
Margin Performance Has Been Mixed but the Guidance Bar is Low
The profitability broadside is little chopped and dry. On a YTD basis, adj. EBITDA borderline is down ~4%pts connected an integrated ground and ~3%pts including acquisitions amid a question of headwinds. These see operating deleverage from the little prep people pupil basal and inflationary pressures crossed the firm disbursal base. Additionally, the integration of caller acquisitions specified arsenic Unigranrio is besides temporarily weighing connected margins, portion integer services profitability is apt underperforming the radical mean arsenic well. Relative to the adj. EBITDA (ex-acquisitions) guidance scope of R$935m-R$1,015m, Afya has already made important headway connected a nine-month basis, truthful the barroom for a nett bushed isn’t precocious from here.
While absorption hasn’t focused its usher connected FCF generation, I would besides support an oculus retired here. Capex needs person been elevated implicit the past twelvemonth amid higher requirements for field attraction and the buildout of caller aesculapian and continuing acquisition campuses. The capex rhythm should upwind down by 1-2%pts YoY for FY23, though, supporting higher currency travel procreation going forward. With the superior allocation model focused connected inorganic growth, much currency should thrust a higher net maturation algorithm implicit the mid to long-term.
On Track for More Seat Expansion arsenic the Growth Story Continues
With the latest circular of spot enlargement astatine FASA greenlighted by the Ministry of Education, Afya looks connected way for much upside successful the coming months. At ~ R$2.2m/seat (per the UNIT Alagoas/FITS Jaboatão woody economics), the further 64 aesculapian seats could adhd R$141m to Afya's marketplace value. This isn’t a crippled changer, but it does item Afya’s maturation runway arsenic it continues to thrust further spot enlargement implicit time.
Meanwhile, the main undergrad aesculapian acquisition and specialization courses businesses are seeing a steadfast post-COVID recovery, reinforcing Afya’s existing (and growing) competitory edge. The ongoing P&L unit astatine the smaller integer services concern remains a blemish but the stableness and maturation from the halfway businesses should much than offset the headwinds here. The banal trades astatine a comparative discount to Cogna and Anima astatine ~9x FY24 net and should re-rate arsenic the Afya maturation communicative continues to play out.
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