Expanding Medical And Law Courses Will Secure Robust Future Stability

Key Takeaways

• Strategic focus on high-priced health and law courses and expanding medical education boosts enrollments, revenue, and financial stability.
  
• Operational optimization increases EBITDA and reduces debt, enhancing future financial leverage and margins.
  
• Heavy reliance on nonrecurring items and external factors may cause volatility, with competition and investments impacting revenue, margins, and financial stability.

Catalysts

Develops and manages activities for on-campus and distance-learning undergraduate, graduate, and professional training courses and other education-related areas in Brazil.

• Ser Educacional's significant increase in operating cash generation, over 200% compared to last year, indicates a strong potential for future revenue growth and net margin improvement driven by enhanced financial leverage and asset utilization.
  
• The expansion in the number of medical education places, with over 1,000 new spots approved, promises to boost enrollments and increase revenues, particularly given that medical courses typically have higher tuition fees.
  
• The strategic focus on health and law courses, which have higher price profiles, aims to improve net margins and cash generation, suggesting future financial stability and resilience.
  
• The company's operational optimization plan has already resulted in notable increases in adjusted EBITDA and will likely continue to positively impact earnings by further reducing net debt and financial leverage.
  
• The ongoing conservative expansion process, including the opening of new units in strategic locations, is expected to drive revenue growth and student base expansion, thereby supporting increased operating and financial margins.

Ser Educacional Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Ser Educacional's revenue will grow by 6.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from -0.1% today to 6.5% in 3 years time.
• Analysts expect earnings to reach R$153.7 million (and earnings per share of R$1.19) by about April 2028, up from R$-1.2 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting R$214 million in earnings, and the most bearish expecting R$93.4 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 11.0x on those 2028 earnings, up from -577.5x today. This future PE is greater than the current PE for the BR Consumer Services industry at 10.7x.
• Analysts expect the number of shares outstanding to decline by 1.34% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 24.25%, as per the Simply Wall St company report.

Ser Educacional Future Earnings Per Share Growth

Risks

• The reliance on nonrecurring items and provisions, such as the R$70 million provision for PDD of FG-FIES, could create volatility and unpredictability in net income, impacting the company's financial results negatively.
  
• The company's future financial performance may be significantly impacted by macroeconomic events and political factors, which could affect revenue and earnings.
  
• Increasing competition in the education sector, particularly in on-site and online courses, could pressure the company’s revenue and average ticket prices if they need to offer more discounts to attract and retain students.
  
• The company's heavy investment in medical courses and new campuses may not yield the expected returns if student enrollment does not meet projections, which could impact revenue and cash flow.
  
• The impact of IFRS 16 adjustments and property return write-offs may affect net margins and revenue recognition, leading to discrepancies in financial reporting and potential negative effects on earnings.

Valuation

• The analysts have a consensus price target of R$7.3 for Ser Educacional based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of R$9.9, and the most bearish reporting a price target of just R$5.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be R$2.4 billion, earnings will come to R$153.7 million, and it would be trading on a PE ratio of 11.0x, assuming you use a discount rate of 24.3%.
• Given the current share price of R$5.3, the analyst price target of R$7.3 is 27.4% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.