Premium And Home Care Diagnostics Will Drive A Stronger Long-Term Outlook

Catalysts

About Diagnósticos da América

Diagnósticos da América provides diagnostic medicine and related health services across Brazil, with a growing focus on premium, home care and B2B solutions.

What are the underlying business or industry changes driving this perspective?

• Rapid expansion of premium and home care diagnostic services, supported by higher test frequency and brand strengthening in major urban centers, is expected to lift revenue growth and sustain a richer mix that supports higher average tickets and gross margins.
• A structural shift toward integrated care with payers such as Amil, including joint solutions and accreditations, should deepen volumes from a large insured base and enhance operating leverage, driving earnings growth over time.
• Ongoing optimization of the diagnostics network, including closing underperforming units and adding asset-light corporate collection points, is improving capacity utilization and cost efficiency, which should translate into stronger net margins.
• Disciplined capital allocation, with sharply lower CapEx and divestment of noncore international and occupational medicine operations, is freeing resources for higher return investments in core diagnostics and AI capabilities, supporting cash generation and earnings quality.
• Sustained improvement in working capital efficiency, reflected in shorter receivable cycles, reduced inventory days and a stronger capital structure with lower leverage, is expected to enhance operating cash flow and reduce financial expenses, supporting net income.

Assumptions

This narrative explores a more optimistic perspective on Diagnósticos da América compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts. How have these above catalysts been quantified?

• The bullish analysts are assuming Diagnósticos da América's revenue will decrease by 6.9% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from -8.2% today to 1.1% in 3 years time.
• The bullish analysts expect earnings to reach R$111.4 million (and earnings per share of R$0.02) by about December 2028, up from R$-1.0 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 74.0x on those 2028 earnings, up from -4.4x today. This future PE is greater than the current PE for the BR Healthcare industry at 17.0x.
• The bullish analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 18.16%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The company is heavily reliant on sustained growth in premium, home care and B2B diagnostics, so any slowdown in these higher value segments or loss of market share to competitors could undermine recent double digit domestic growth and weaken revenue and gross margin expansion over time.
• The strategy of closing lower performing units, concentrating capacity and using very asset light corporate collection points increases operational leverage. This could backfire if test volumes plateau or fall, causing fixed costs to be spread over fewer procedures and compressing EBITDA margins and earnings.
• Although leverage has fallen, Dasa still carries a sizable BRL 6.7 billion net debt load with a three year maturity profile. Higher interest rates, tighter credit markets or difficulty rolling over debentures on attractive spreads could increase financial expenses and pressure net income and cash flow generation.
• The joint venture with Amil and the carve out of hospitals and oncology operations introduce structural dependence on a single large payer and complex equity accounting. Any deterioration in this partnership, renegotiation of contracts on less favorable terms or weaker performance at Rede Américas could reduce volumes and dilute Dasa's EBITDA and earnings contribution from this channel.
• Management is cutting CapEx sharply and pursuing aggressive cost and SG&A reductions to boost short term profitability. However, underinvestment in technology, equipment or capacity and overemphasis on expense cuts could erode service quality and brand strength in the long run, ultimately weighing on pricing power, average ticket growth and net margins.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bullish price target for Diagnósticos da América is R$4.0, which represents up to two standard deviations above the consensus price target of R$2.36. This valuation is based on what can be assumed as the expectations of Diagnósticos da América's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of R$4.0, and the most bearish reporting a price target of just R$1.0.
  
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2028, revenues will be R$10.2 billion, earnings will come to R$111.4 million, and it would be trading on a PE ratio of 74.0x, assuming you use a discount rate of 18.2%.
  
• Given the current share price of R$3.64, the analyst price target of R$4.0 is 9.0% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• 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.