Afya Readies Plans For $234 Million IPO

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About: Afya (AFYA), Includes: GE, LAUR
by: Donovan Jones
Summary

Afya has filed proposed terms for a U.S. IPO of its Class A shares.

The firm provides educational services to medical professional students in Brazil.

AFYA has produced impressive growth but the IPO is too expensive for my taste.

Quick Take

Afya (AFYA) has filed to raise gross proceeds of $234 million from a U.S. IPO, according to an F-1/A registration statement.

The firm provides technology-based, personalized educational services for physicians in Brazil.

AFYA management is proposing a high IPO valuation while the Brazilian economy and currency is still subject to unforeseen shocks, so I'll be watching this IPO from the sidelines.

Company & Technology

Minas Gerais, Brazil-based Afya was founded in 2016 to operate a network of undergraduate and graduate campuses as well as a digital medical education platform for physicians.

On March 29, 2019, BR Health and Guardaya merged into Afya, resulting in the transfer of 100% of Medcel Editora and CBB Web, as well as 15% of UEPC - a medical school with 120 undergraduate medical seats located in the Federal District.

Management is headed by CEO Virgilio Deloy Capobianco Gibbon, who has been with the firm since 2016 and was previously Chief Operating Officer and Chief Financial Officer of Estácio Participação.

Afya provides education that enables physicians to become lifelong learners by facilitating medical tutoring, residency preparation, graduation program, and continuing medical education activities.

As of March 31, 2019, the company’s network of 14 undergraduate and graduate medical school campuses consisted of 9 operating units, or units that have been approved by the MEC and have commenced operations and 5 approved-only units. In comparison, as of March 31, 2018, the firm had 4 operating units.

Additionally, as of the end of March 2019, the firm’s network had 1,167 medical school seats, among which 917 in the operating and 250 in the approved-only campus units, compared to 636 operating seats as of March 31, 2018.

Following AFYA’s acquisition of Medcel in Q1 2019, the company’s seats currently increased to 1,352, of which 1,102 operating and 250 approved.

Management claims that according to data published by the Brazilian Ministry of Education [MEC], as of the end of 2018, Afya was the largest medical education group in Brazil, based on number of medical school seats.

Student Acquisition

Afya uses both online and offline media marketing channels to identify potential student enrollments.

Once a potential student has been identified, he or she is examined and based on qualifications and needs, the company’s sales department takes over to convert potential students into enrolled students by utilizing structured sales campaigns and continuous monitoring of conversion indices.

General & Administrative expenses as a percentage of revenue have been stable to slightly higher, per the table below:

G&A

Expenses vs. Revenue

Period

Percentage

To March 31, 2019

21.6%

2018

21.0%

2017

21.0%

Sources: Company registration statement and IPO Edge

Average Revenue per student has been uneven, per the table below:

Average Revenue Per

Student

Period

ARPS

Variance

To March 31, 2019

$5,650.97

28.3%

2018

$4,402.79

-20.3%

2017

$5,525.59

Sources: Company registration statement and IPO Edge

Market & Competition

According to a 2018 market research report by Zion Market Research, the global medical education market was valued at about $27.2 billion in 2016 and is projected to reach $36.2 billion by 2022, growing at a CAGR of 4.9% 2017 and 2022.

The main factors driving market growth are the need to cure chronic diseases, an increasing awareness of global health problems and a growing penetration of the Internet.

The Asia Pacific region is projected to grow at the fastest rate during the forecast period.

Major competitors that provide medical education services in Brazil and globally include:

  • UNINOVE

  • Laureate Education (LAUR)

  • Estácio (BVMF:ESTC3)

  • TACT Academy for Clinical Training

  • Apollo Hospitals (NSE:APOLLOHOSP)

  • Olympus America (TYO:7733)

  • Zimmer Institute

  • GE Healthcare (GE)

  • Gundersen Health System

  • Medical Training College

Source: Sentieo

Financial Performance

AFYA’s recent financial results can be summarized as follows:

  • Growing topline revenue

  • Strong increase in gross profit and gross margin

  • Increased operating profit and operating margin

  • Sharp growth in net income and cash flow from operations

Below are relevant financial metrics derived from the firm’s registration statement:

Total Revenue

Period

Total Revenue

% Variance vs. Prior

To March 31, 2019

$ 37,590,280

135.8%

2018

$ 86,823,100

54.6%

2017

$ 56,162,080

Gross Profit (Loss)

Period

Gross Profit (Loss)

% Variance vs. Prior

To March 31, 2019

$ 23,455,640

172.3%

2018

$ 43,129,580

80.4%

2017

$ 23,905,180

Gross Margin

Period

Gross Margin

To March 31, 2019

62.40%

2018

49.68%

2017

42.56%

Operating Profit (Loss)

Period

Operating Profit (Loss)

Operating Margin

To March 31, 2019

$ 15,281,240

40.7%

2018

$ 25,076,480

28.9%

2017

$ 12,829,180

22.8%

Net Income (Loss)

Period

Net Income (Loss)

To March 31, 2019

$ 12,863,760

2018

$ 24,630,840

2017

$ 48,479,000

Cash Flow From Operations

Period

Cash Flow From Operations

To March 31, 2019

$ 15,010,320

2018

$ 20,882,680

2017

$ 10,378,420

Sources: Company registration statement and IPO Edge

As of March 31, 2019, the company had $63.8 million in cash and $145.3 million in total liabilities. (Unaudited, interim)

Free cash flow during the twelve months ended March 31, 2019, was $25.1 million.

IPO Details

AFYA and selling shareholders intend to raise $234 million in gross proceeds from an IPO of 13.7 million shares of its Class A stock at a midpoint price of $17.00 per share, not including customary underwriter options.

Class A shareholders will be entitled to one vote per share and Class B shareholders ten votes per share.

Multiple classes of stock are a way for existing investors and management to retain voting control after ceding economic control.

The S&P 500 Index no longer admits firms with multiple classes of stock into its index.

Assuming a successful IPO, the company’s enterprise value at IPO would approximate $1.45 billion.

Per the firm’s latest filing, it plans to use the net proceeds from the IPO as follows:

We intend to use the net proceeds from this offering to fund future acquisitions (including at least 1,000 medical school seats) and investments in complementary businesses, products or technologies and for general corporate purposes.

Management’s presentation of the company roadshow is available here.

Listed underwriters of the IPO are BofA Merrill Lynch, Goldman Sachs, UBS Investment Bank, Itau BBA, Morgan Stanley, BTG Pactual, and XP Investments.

Commentary

Afya is seeking U.S. public capital to fund its acquisition strategy within Brazil.

The firm’s financials show strong and accelerating growth across all major metrics, so management is performing well.

The market opportunity for medical education is growing worldwide, although at a somewhat lower growth rate.

Afya’s growth in this context is impressive as it vastly exceeds the overall industry growth.

As to valuation, management is asking IPO investors to pay richly for its growth trajectory, with a proposed EV / Revenue of over 13x.

Compared to competitor Estacio Participacoes at 2.8x, this valuation assumption appears quite high, even after accounting for Afya’s higher growth rate.

The Brazilian economy has been in the process of emerging from a deep recession but has been buffeted by uncertainties from recent trade tensions between the U.S. and China, and is likely dependent on the outcome from those trade negotiations.

Additionally, investors will be exposed to exchange rate fluctuations since the firm’s business is conducted in Brazilian Reais, which have dropped as much as 10% against the U.S. dollar in the past 12 months alone.

Given the high valuation management is proposing and continued risks to the Brazilian macroeconomic environment, the IPO is too pricey for my taste.

Expected IPO Pricing Date: July 18, 2019.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.