Brazil's Decline And Competition Will Shrink Enrollment But Prompt Recovery

Key Takeaways

• Growth prospects face demographic risks and rising competition from alternative credentials, potentially limiting student base expansion and reducing demand for traditional programs.
  
• Margin improvements may be challenged by online competitors, regulatory uncertainties, and financial accessibility issues, impacting long-term earnings and scalability.
  
• Demographic shifts, regulatory uncertainty, rising competition, changing education preferences, and high fixed costs threaten Yduqs' enrollment growth, pricing power, and long-term profitability.

Catalysts

Provides higher education services in Brazil.

• While Yduqs is benefiting from a young population and growing workforce re-skilling needs-factors supporting long-term enrollment growth-the company faces structural headwinds from Brazil's declining birth rate and an aging population, which may eventually shrink the addressable student base and limit sustainable revenue expansion.
  
• Despite ongoing investments in digital platforms and technology that are lowering student acquisition costs and improving retention rates, the rapid evolution of alternative credentialing-such as bootcamps and microdegrees-poses a risk of undermining demand for traditional degree programs, putting pressure on volume growth and average ticket size over time.
  
• While the expansion of hybrid and premium health sciences programs has driven higher average revenue per student and operational margin gains, Yduqs remains exposed to intensifying competition from low-cost online education providers that could compress margins if student preferences shift and price competition escalates.
  
• Although there has been strong cash generation and improved receivables management driven by tighter revenue recognition and a higher mix of premium brands, future revenue and net margin growth could be constrained if rising societal debt aversion and reductions in government loan program support make higher education less financially accessible for a significant portion of Brazil's population.
  
• Despite the new regulatory framework stabilizing the industry and enabling growth in regulated modalities like Semi On-campus, Yduqs remains at risk of further regulatory changes or heightened accreditation standards that could raise compliance costs or limit expansion, thus threatening long-term earnings growth and return on capital.

Yduqs Participações Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Yduqs Participações compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Yduqs Participações's revenue will grow by 5.9% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 5.9% today to 10.6% in 3 years time.
• The bearish analysts expect earnings to reach R$674.4 million (and earnings per share of R$2.53) by about August 2028, up from R$319.5 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 8.1x on those 2028 earnings, down from 10.7x today. This future PE is lower than the current PE for the BR Consumer Services industry at 9.8x.
• Analysts expect the number of shares outstanding to decline by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 22.7%, as per the Simply Wall St company report.

Yduqs Participações Future Earnings Per Share Growth

Risks

• Brazil's declining birth rate and aging population could lead to a shrinking pool of prospective higher education students over the long term, eventually resulting in enrollment stagnation or decline which would pressure Yduqs' revenues and growth potential.
  
• Societal aversion to student debt and the possibility of further government cutbacks on educational funding programs such as FIES may reduce student affordability and willingness to enroll, negatively impacting tuition revenue and increasing churn risk.
  
• Intensifying competition from low-cost digital and alternative education providers, combined with the rising popularity of microcredentials and bootcamps over traditional degrees, could erode Yduqs' pricing power and compress net margins if the company cannot differentiate its offerings effectively.
  
• Regulation changes and evolving accreditation requirements could increase compliance costs or restrict Yduqs' flexibility in program delivery, especially if government policies become more restrictive toward private sector education providers, leading to less predictable earnings and margin pressure.
  
• High operational leverage due to significant fixed costs in campus infrastructure and integration of recent acquisitions presents a risk if student growth does not materialize as projected, as even slight dips in enrollment or price sensitivity may disproportionately impact earnings and profitability.

Valuation

• The assumed bearish price target for Yduqs Participações is R$14.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Yduqs Participações's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of R$29.7, and the most bearish reporting a price target of just R$14.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be R$6.4 billion, earnings will come to R$674.4 million, and it would be trading on a PE ratio of 8.1x, assuming you use a discount rate of 22.7%.
  
• Given the current share price of R$13.05, the bearish analyst price target of R$14.0 is 6.8% 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.