Afya Ltd annual report, Q4 FY2020

Business context and reporting period

Afya Limited’s Form 20-F is an audited annual report for the fiscal year ended December 31, 2020—not a standalone fourth-quarter filing. Afya is a Brazil-focused medical education and digital health services group. Financial statements are prepared under IFRS in Brazilian reais (R$); U.S. dollar figures are convenience translations. Results include acquired businesses only from their respective acquisition dates, limiting comparability with prior years.

Key financial and operating metrics

Revenue growth reflected organic growth, including maturation of medical school seats, and acquisitions. Management attributed approximately 55% of 2020 net revenue growth to acquisitions and 45% to organic growth. Education Services revenue was R$1,002.5m; Digital Content, Residency Preparatory and Specialization Programs revenue was R$200.3m.

Cash and cash equivalents were R$1,045.0m at year-end, versus R$943.2m in 2019. Current assets were R$1,405.5m and current liabilities R$589.4m. Investing cash outflow was R$1,042.8m, principally reflecting acquisitions; financing cash inflow was R$756.4m. Capital expenditures were R$137.6m in 2020; management budgeted R$157.1m for 2021.

Year-end debt and other obligations included loans and financing of R$617.5m, lease liabilities of R$447.7m, amounts payable to selling shareholders of R$518.2m, and notes payable of R$76.2m. Afya’s stated net debt measure was R$612.5m, calculated after deducting cash and restricted cash from loans, leases, seller payables and notes payable. Contractual undiscounted obligations totaled R$2,451.1m, including R$1,023.5m of lease payments.

Medical school tuition represented 73.7% of historical undergraduate combined tuition fees; medicine and other health sciences together represented 86.0%. These operating tuition metrics are not equivalent to IFRS net revenue. The Brazilian real depreciated 28.9% against the U.S. dollar during 2020, affecting the U.S.-dollar translation of results.

Material changes versus the prior comparable period

• Net revenue rose 60.0%; gross profit grew faster than revenue, while general and administrative expenses rose 68.5% to R$402.9m, including higher acquisition integration costs and doubtful-account provisions.
• Cost of services declined to 36.2% of revenue from 41.1%, supporting gross-margin expansion. Net finance expense increased to R$36.0m from R$20.7m, partly due to lease interest and financial discounts.
• Receivables increased to R$302.3m from R$125.4m; the allowance for doubtful accounts rose to R$33.0m from R$14.8m. Management cited increased tuition delinquencies, particularly among non-medical students.
• Investing cash outflow increased substantially, chiefly because net cash paid for acquisitions rose. Loans and financing increased from R$60.4m to R$617.5m, including a R$500m Itaú loan and a R$100m Banco Votorantim loan.
• Acquisitions expanded the group’s medical school and digital health operations. Results are not fully comparable because acquired businesses are consolidated from acquisition dates; 2020 also included a full year of Medcel and IPEMED, versus partial-year contributions in 2019.

Outlook, risks, contingencies and unusual items

• Management said available cash and operating cash flows should cover ordinary working capital and capital expenditure needs for the next 12 months. It planned R$157.1m of 2021 capital expenditures and expected to open additional medical campuses, subject to regulatory requirements.
• Management described growth strategies including seat maturation, expansion of residency preparation and graduate programs, digital health services, cross-selling, and selective acquisitions. The filing gives no formal revenue or earnings guidance. It presents potential student-capacity targets, which depend on approvals, acquisitions and operating assumptions.
• COVID-19 restrictions interrupted on-campus activity from March 2020. Afya moved non-practical instruction online and rescheduled some practical activities; R$2.4m of revenue was deferred to 2021. Mandatory tuition discounts totaled R$6.5m, with related legal challenges and state measures. Management warned that renewed restrictions, student affordability, attrition and collections could adversely affect results.
• Probable legal-proceeding provisions were R$53.1m; possible-loss matters without provisions totaled R$66.7m. The filing also describes regulatory proceedings and possible liabilities, including a case involving the chairman that could affect tax benefits and access to government education programs if decided adversely.
• The company reported a material weakness in IT general controls; management concluded internal control over financial reporting and disclosure controls were ineffective at year-end. The auditor issued an adverse opinion on internal control, while giving an unqualified opinion on the IFRS financial statements. Remediation, including access-management and segregation-of-duties improvements, was planned for 2021.
• Acquisition accounting involved significant estimates: 2020 acquisitions had R$952.5m of identified intangible assets and preliminary purchase-price allocations. Goodwill and indefinite-lived licenses totaled substantial balances; no impairment was recorded, but valuations depend on forecasts and discount rates.
• After year-end, Afya completed or announced further acquisitions and agreed to a SoftBank investment of approximately R$822m in perpetual convertible preferred shares, subject to closing conditions. The preferred shares carry a 6.5% cumulative dividend and conversion and redemption terms; the transaction may affect dilution and capital structure.
• Adjusted EBITDA and cash conversion are non-IFRS measures defined by Afya and may not be comparable with other companies. Afya stated it did not anticipate common dividends in the foreseeable future.

Important facts for investors to verify

• Separate organic growth from acquisition contributions and confirm the post-acquisition period included for each business.
• Review receivables aging, collection trends, doubtful-account allowances and the timing and recovery of deferred or disputed tuition amounts.
• Assess debt maturities, variable-rate exposure, seller-payment obligations, lease commitments and the company’s net-debt definition.
• Track acquisition integration, purchase-price allocation, goodwill and intangible-asset assumptions, and subsequent impairment testing.
• Check progress in remediating the IT-controls material weakness and whether acquired businesses’ controls are brought into the evaluation.
• Follow COVID-19 impacts, regulatory approvals for campuses and seats, tuition-discount litigation, and the legal and tax matters disclosed in the filing.
• Confirm closing terms and potential dilution from the SoftBank preferred investment, share-based awards and share repurchases.