Acquisitions Like Unidom And Mais Médicos Expansion Will Strengthen Position In Healthcare Education

Key Takeaways

• Afya's expansion of medical seats and acquisitions is expected to drive revenue and margin growth in the Undergrad segment.
  
• Growth in Medical Practice Solutions and operational restructuring indicate strong revenue and margin improvements across segments.
  
• The company's reliance on uncertain forward-looking statements, lacking dividend policy, and competitive pressures could adversely affect profit margins and investor confidence.

Catalysts

Operates as a medical education group in Brazil.

• Afya's planned expansion of medical seats, including acquisitions like Unidom and future bids on the Mais Médicos program, is expected to drive significant revenue growth by increasing the number of students.
  
• The growth in medical students and tuition increases contribute to revenue growth and margin expansion within Afya's Undergrad segment.
  
• Continued expansion of Afya's Medical Practice Solutions segment, especially through B2B contracts, is likely to drive revenue and earnings growth as it capitalizes on expanding its market in the healthcare industry.
  
• Operational restructuring in the Continuing Education segment has led to margin expansion and is expected to continue driving revenue growth and improve margins.
  
• Afya’s focus on disciplined capital allocation and operational leverage, along with dividend initiation, suggests they have strong cash flow and a strategy to enhance earnings and shareholder value.

Afya Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Afya's revenue will grow by 7.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 19.1% today to 25.4% in 3 years time.
• Analysts expect earnings to reach R$1.0 billion (and earnings per share of R$16.39) by about April 2028, up from R$631.5 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.5x on those 2028 earnings, down from 14.2x today. This future PE is lower than the current PE for the US Consumer Services industry at 17.4x.
• Analysts expect the number of shares outstanding to grow by 0.33% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.19%, as per the Simply Wall St company report.

Afya Future Earnings Per Share Growth

Risks

• The reliance on forward-looking statements presents risks since actual outcomes may differ materially due to uncertainties, potentially impacting future revenues and earnings.
  
• The company has not established a formal dividend policy, which means future dividend payouts are uncertain and could affect investor confidence and perceived value, impacting share prices negatively related to expected shareholder returns.
  
• Increased competition in acquiring additional medical seats and the accompanying CapEx required could pressure profit margins if the returns on these investments are not as high as anticipated or if there's a delay in receiving government approval, affecting net margins and potential earnings.
  
• Currency and regional economic factors, such as tuition fee constraints or government intervention in pricing, could limit revenue growth, especially if economic conditions in Brazil change or if legislation impacts pricing strategies, affecting revenue and profit margins.
  
• While the Medical Practice Solutions segment has shown growth, the saturation of the B2P market and potential slowdowns in B2B contracts could limit future revenue expansion in this segment, affecting overall revenue and growth forecasts.

Valuation

• The analysts have a consensus price target of $19.175 for Afya 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 $25.03, and the most bearish reporting a price target of just $15.16.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be R$4.1 billion, earnings will come to R$1.0 billion, and it would be trading on a PE ratio of 13.5x, assuming you use a discount rate of 10.2%.
• Given the current share price of $16.61, the analyst price target of $19.18 is 13.4% 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.