Brazil Demographic Decline And Digital Competition Will Limit Medical Demand

Key Takeaways

• Demographic changes and economic volatility threaten future enrollment growth and revenue stability, exposing Afya to risks in sustaining its financial trajectory.
  
• Intensifying competition from digital education and policy uncertainties undermine pricing power and increase vulnerability to regulation, potentially lowering profitability and growth prospects.
  
• Expanding medical education demand, strong cost control, digital revenue growth, and ESG achievements position Afya for improved profitability and financial flexibility.

Catalysts

Operates as a medical education group in Brazil.

• Brazil's potential demographic shifts, including declining birth rates and a shrinking pool of young adults, could significantly dampen the future demand for medical education, which would limit Afya's ability to sustain enrollment growth and put their long-term core revenue trajectory at risk.
  
• The proliferation of digital education alternatives and increased access to global online platforms is likely to intensify competition and erode Afya's pricing power, ultimately pressuring average tuition rates and leading to lower net margins over time.
  
• Heavy reliance on the regulated medical education sector exposes Afya to the risk of abrupt government policy changes regarding quotas, funding, or accreditation, any of which could directly disrupt revenue stability and restrict tuition-fee growth prospects.
  
• Increasing macroeconomic volatility in Brazil, such as persistent inflation or economic downturns, may constrain household spending on private education, leading to higher default rates, weaker organic revenue growth, and reduced profitability for Afya during cyclical downturns.
  
• Ongoing regulatory scrutiny, industry-wide saturation of medical education programs, and rising competition could slow occupancy rates and enrollment in future years, causing long-term revenue growth and earnings expansion to fall short of current elevated expectations priced into the stock.

Afya Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Afya compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Afya's revenue will grow by 7.3% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 19.8% today to 23.8% in 3 years time.
• The bearish analysts expect earnings to reach R$1.0 billion (and earnings per share of R$11.36) by about June 2028, up from R$680.1 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 10.9x on those 2028 earnings, down from 13.4x today. This future PE is lower than the current PE for the US Consumer Services industry at 19.6x.
• Analysts expect the number of shares outstanding to grow by 0.11% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.59%, as per the Simply Wall St company report.

Afya Future Earnings Per Share Growth

Risks

• Strong demographic tailwinds in Brazil, evidenced by a 15% year-over-year growth in medical students and 12% yearly increase in approved medical seats, suggest ongoing robust demand for medical education, supporting high occupancy and future revenue growth.
  
• Expansion and ramp-up of newly acquired campuses and medical seats, with smooth integration and nearly 100% occupancy, position Afya for continued top-line growth and enhanced scale, which could drive improvements in earnings and margins over time.
  
• Effective cost management and operational restructuring, as seen in expanded gross and EBITDA margins (with first quarter adjusted EBITDA margin reaching 52.5%), indicate significant operating leverage and potential for sustained net margin improvement as Afya grows.
  
• Increasing penetration of recurring digital and B2B solutions among a growing base of physicians and medical students, as shown by increases in B2B contracts and active payers, provides higher-margin revenue streams that can diversify earnings and lift overall profitability.
  
• Positive recognition from ratings agencies and achievement of ESG targets, including Moody's national credit rating upgrade and an initial MSCI rating above peers, improve financing flexibility and can contribute to lower cost of capital, further strengthening Afya's balance sheet and net income potential.

Valuation

• The assumed bearish price target for Afya is $16.46, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Afya'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 $25.27, and the most bearish reporting a price target of just $16.46.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be R$4.2 billion, earnings will come to R$1.0 billion, and it would be trading on a PE ratio of 10.9x, assuming you use a discount rate of 10.6%.
  
• Given the current share price of $18.34, the bearish analyst price target of $16.46 is 11.5% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• 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.