Afya Could Slide Further When IPO Lockup Expires

Jan. 06, 2020 3:16 PM ETAfya Limited (AFYA)
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Don Dion
12.68K Followers

Summary

  • When the IPO lockup period for AFYA ends on January 15th, more than 13 million currently restricted shares will be eligible for trading.
  • With just 13.7 million shares trading pursuant to the IPO, any significant sales of currently-restricted stock could flood the secondary market and cause a short-term downturn in share price.
  • Aggressive, risk-tolerant investors should consider shorting shares of AFYA ahead of the IPO lockup expiration.
  • Looking for more stock ideas like this one? Get them exclusively at IPO Insights. Get started today »

When the 180-day lockup period for Afya Ltd. (NASDAQ:AFYA) ends on January 15, 2020, pre-IPO shareholders and company insiders will be able to sell more than 13 million currently-restricted shares in the secondary market. With just 13.7 million shares trading pursuant to the IPO, any significant sales could flood the secondary market and cause a sharp, short-term downturn in share price.

(Source: S-1/A)

Trading in AFYA has been mixed during this six-month period. The stock had a first day return of 26.8%. The shares climbed to a high of $32.32 on August 27, but then began a sharp decline reaching $21.90 on August 30. Currently, the stock trades between $27 and $28, a 43.9% return from IPO.

We believe that despite mixed trading, many of the pre-IPO shareholders and company insiders will be eager to cash in on some of their gains when the IPO lockup expires. Aggressive, risk-tolerant investors should consider shorting shares of AFYA before the company's lockup expiration on January 15th.

Business Overview: Medical Education Group in Brazil

Afya Ltd. is the top medical education organization based in Brazil through December 2018 based on the number of medical school seats available. In its SEC filings, the organization describes itself as an end-to-end ecosystem designed to educate physicians and take them from education to residency preparation, graduation, and ongoing education requirements. The company uses interactive learning, integrated content, and adaptive experiences to encourage continuing education in the medical field. Through technology and its educational content, Afya offers personalized education that parallels one-to-one tutoring.

(Source: Afya website)

Afya has undergraduate and graduate programs across 12 states in Brazil. Its digital platform offers education across Brazil. As of March 31, 2019, Afya operates a network of 14 undergraduate and graduate campuses comprised of nine operating units versus five operating units in March 2018 and four operating units in December 2017. As of March 2019, they offered 1,167 medical school seats comprised of 917 operating seats and 250 approved seats. (Operating seats have been approved by the Brazilian Ministry of Education. Approved seats have approval by the Ministry of Education; however, they have not begun operations.) After acquisitions in Q2 of 2019, Afya has a total of 1,352 medical school seats and 16 operating campuses. Afya intends to expand to 23 campuses. In addition, Afya offers health care education programs in biomedicine, nutrition, physiotherapy, physical education, pharmacy, psychology, radiology, nursing, and dentistry. The company also offers degrees in pedagogy, industrial engineering, civil engineering, physical education, law, accounting, and business administration.

The company has approximately 2,700 employees and keeps its headquarters in Minas Gerais, Brazil.

Company information was sourced from the company's website and S-1/A.

Financial Highlights

Afya reported the following highlights for the end of the third quarter for fiscal 2019 ended September 30, 2019:

  • Net revenue reached BRL 207 million for an increase of 124% versus the same period prior year.
  • Revenue rose to BRL 530 million for an increase of 133% and reached BRL 609 million on a pro forma basis.
  • Adjusted EBITDA was approximately BRL 81 million for an increase of 147% in the same quarter the prior year.
  • Adjusted net income reached BRL 72 million for an increase of 155% in the third quarter of fiscal 2019.

Financial information sourced from the company's website and press releases.

Management Team

Chairman of the Board Nicolau Carvalho Esteves has served in his position since June 2019. He is an orthopedist and has been Chair of Afya Brazil from August 2016. He has served in executive positions at ITPAC – Instituto Tocantinense Presidente Antônio Carlos S.A., ITPAC Porto Nacional – Instituto Tocantinense Presidente Antônio Carlos Porto S.A., IPTAN – Instituto de Ensino Superior Presidente Tancredo de Almeida Neves S.A., and Instituto de Educação Superior do Vale do Parnaíba S.A. He earned his medical degree from Faculdade de Medicina de Barbacena and a master’s degree in Business Administration from FEAD.

Director Renato Tavares Esteves has served in his position since June 2019. He has served in executive positions at Instituto de Educação Superior do Vale do Parnaíba S.A., IPTAN – Instituto de Ensino Superior Presidente Tancredo de Almeida Neves S.A., and Instituto de Ensino Superior do Piauí S.A. He earned a medical degree from Faculdade de Medicina de Barbacena.

Biographical information sourced from the company's website.

Competition: Universidade de Sao Paolo, Federal University of Sao Paolo and Others

Brazil has a number of medical schools that compete with Afya including Federal University of Sao Paola, Universidade de Sao Paolo, Federal University of Minas Gerais, and Federal University of Rio Grande do Sul. In addition, many of the world’s top medical schools attract students from many countries. These include Harvard Medical School, John Hopkins University, Stanford University, and Columbia University.

Early Market Performance

The underwriters for Afya priced its IPO at $19. The stock had a first day return of 26.8%. It reached a high of $32.32 on August 27 only to drop sharply to $21.90 on August 30. AFYA currently has a return from IPO of 43.9%.

Conclusion: Short Shares of AFYA ahead of Lockup Expiration

When the AFYA IPO lockup expires on January 15th, pre-IPO shareholders and company insiders will be able to sell more than 13 million currently-restricted shares. We believe that these pre-IPO shareholders and company insiders will be eager to cash in on some of those gains since AFYA has a return from IPO of nearly 44%.

When the currently-restricted shares are unlocked, there is a potential for these shares to flood the secondary market for AFYA and cause a sharp, short-term downturn in share price. Aggressive risk-tolerant investors should consider shorting shares of AFYA ahead of the IPO lockup expiration. Interested investors should cover short positions during the January 16th and 17th trading sessions.

Interested in learning more about IPO Lockup investment opportunities? Check out our subscription service, IPO Insights. We update subscribers with actionable investment opportunities that follow the debut of select companies on U.S. exchanges.

This article was written by

Don Dion profile picture
12.68K Followers
Don Dion is the CEO of Inland Management, a company focused on acquiring, subdividing, developing and marketing large tracts of land on the fringes of major metropolitan markets. Inland Management has sold land in all 48 contiguous states totaling billions of dollars. As CEO, Don is responsible for helping to maintain and enhance the firm’s strong financial position and identifying opportunities for growth. In addition to his role at Inland Management, Don Dion is the Chief Investment Officer of DRD Investments, LLC. Based in Naples, FL. and Williamstown, MA., DRD Investments is a family office focused on managing a long/short hedge fund, real estate, venture capital and various other financial assets for the Dion family. Don also serves as the trustee of the Dion Family Foundation, which focuses on helping individuals with tuition assistance at Catholic Institutions for grammar school, high school, and college education. The foundation also helps individuals by supporting Massachusetts General Hospital. Don is on two leadership boards and advisory committees at Massachusetts General Hospital and the Home Base Program (a partnership between Mass General and the Red Sox Foundation). He consults with Saint Dominic's Academy and serves as a trustee of Saint Michael’s College. Previously, Don was the founder and CEO of Dion Money Management, a fee-based investment advisory firm for affluent individuals, families and non-profit organizations. Founded in 1996 and based in Williamstown, MA. and Naples, FL., Dion Money Management managed approximately one billion in assets for clients in 49 states and 11 countries. While at Dion Money Management, Don was responsible for setting investment policy, creating custom portfolios, and overseeing the performance of client accounts. Don sold the firm to NYC-based Focus Financial Partners (FOCS) on September 1, 2007 and no longer manages money for other families or institutions. Don remains a shareholder of Focus Financial Partners (FOCS). Don is also the retired publisher of the Fidelity Independent Adviser family of newsletters, which provided a broad range of investor commentary on the financial markets, with a specific emphasis on mutual funds and exchange-traded funds. With nearly 100 thousand subscribers in the United States and 29 other countries, Fidelity Independent Adviser published two monthly newsletters and one weekly newsletter. The flagship publication, Fidelity Independent Adviser, was published monthly for 16 years and reached over 60,000 subscribers. In 2011 Don and his daughter Carolyn co-authored the Ultimate Guide to ETFs, available on Amazon.com. Prior to founding Dion Money Management, Don co-founded Litchfield Financial Corp. (LTCH) with Summit Partners. Don served as Chairman and CEO of Litchfield, which was listed on the Nasdaq in 1992 and acquired by Textron Corp. (TXT) in 1999. Don was also the Executive Vice President, CFO and General Counsel for Patten Corporation (BGX) from 1986 to 1988, where he played a critical role in the company’s successful initial public offering on the New York Stock Exchange. From 1983 to 1985, Don was a corporate lawyer with the Boston Law Firm of Warner and Stackpole. Before joining Warner and Stackpole, Don worked as a C.P.A. for Ernst and Young from 1979 to 1983. Don graduated with honors from Saint Michael’s College in 1976 with a B.S. degree in Economics and Business Administration. He received his J.D. from the University of Maine Law School in 1979 and his LL.M. from Boston University Law School in 1982. Don can be reached at donalddion@gmail.com
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Disclosure: I am/we are short AFYA. 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.

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