Distance Learning Shift And Regulatory Tailwinds Are Expected To Drive Long Term Earnings Expansion

Catalysts

About Vitru

Vitru is a leading Brazilian higher education platform focused on scalable, high quality distance learning, hybrid and medical programs.

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

• Ongoing shift of Brazilian higher education demand toward online and hybrid formats, combined with Vitru’s nearly 900,000 student base and 9.6% growth in distance learning enrollments, creates operating scale that should continue to support revenue growth and sustain high EBITDA margins.
• Structural underpenetration of tertiary education in Brazil, together with Vitru’s deliberate pricing strategy to trade lower tickets for higher retention and engagement, supports a larger, more stable student lifetime value and should underpin resilient top line growth and expanding net income.
• Progressive tightening of regulation and the new hybrid framework favor well capitalized, compliant players, and Vitru’s prior investments in infrastructure and hubs position it to gain share from weaker competitors, supporting revenue acceleration and operating leverage.
• Systematic improvement in working capital through better student mix, payment methods and collections is already reducing days sales outstanding, which should further lift free cash flow conversion and enable faster deleveraging and potential future shareholder distributions.
• Course maturation in higher value segments such as medicine and continued education, already representing a meaningful share of revenue, is likely to shift the portfolio mix toward higher average tickets and structurally higher margins, supporting double digit earnings compounding.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Vitru's revenue will grow by 8.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.0% today to 19.3% in 3 years time.
• Analysts expect earnings to reach R$502.3 million (and earnings per share of R$22.4) by about December 2028, up from R$60.0 million today.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 805.5x on those 2028 earnings, up from 27.2x today. This future PE is greater than the current PE for the US Consumer Services industry at 15.9x.
• Analysts expect the number of shares outstanding to grow 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 14.82%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Competitive pressure on pricing in Brazilian distance learning, including aggressive discounting by smaller and mid-sized rivals under the new hybrid regulatory framework, could force Vitru to sustain or deepen its 4.1% average ticket decline, limiting revenue growth and compressing net margins.
• Structurally high fixed costs inherent to education and a revenue environment already described as below budget mean that any further slowdown in intake or weaker demand during the multi-year regulatory transition could erode operating leverage and stall earnings growth.
• The company is deliberately trading lower initial prices for higher retention and better receivables quality, but if student behavior does not improve as expected or dropout rates rise in a tougher macro or competitive context, provisions for doubtful debts and collection costs could increase again and weigh on earnings and free cash flow.
• Vitru’s strategy to maintain a higher ticket than many peers and invest in hub upgrades and hybrid infrastructure during regulatory changes may require sustained capital expenditure and marketing spend, and if revenue growth lags these investments, free cash flow conversion and deleveraging could slow, limiting room for future shareholder distributions and affecting the share price.

Valuation

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

• The analysts have a consensus price target of $20.75 for Vitru 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 $25.0, and the most bearish reporting a price target of just $16.81.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be R$2.6 billion, earnings will come to R$502.3 million, and it would be trading on a PE ratio of 805.5x, assuming you use a discount rate of 14.8%.
  
• Given the current share price of $9.07, the analyst price target of $20.75 is 56.3% 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.