Business context and reporting period
Afya Limited’s Form 20-F is an audited annual report for the fiscal year ended December 31, 2021, not a standalone fourth-quarter report. Afya is a Cayman Islands holding company whose operating businesses are primarily in Brazil. Its consolidated financial statements are prepared under IFRS and reported in Brazilian reais (R$); U.S. dollar amounts are convenience translations at R$5.580 per US$1.00.
Afya provides undergraduate and continuing medical education and digital health services. During 2021, it added numerous education and technology businesses, revised its reportable segments to Undergrad, Continuing Education and Digital Services, and restated prior-year segment information accordingly. The scope of acquisitions means year-over-year results are not fully comparable.
Financial and operating highlights
| Metric | 2021 | 2020 |
|---|---|---|
| Net revenue | R$1,719.4 million | R$1,201.2 million |
| Gross profit / gross margin | R$1,067.1 million / 62.1% | R$766.5 million / 63.8% |
| Operating income / operating margin | R$440.9 million / 25.6% | R$363.3 million / 30.2% |
| Net income / net margin | R$242.3 million / 14.1% | R$308.0 million / 25.6% |
| Adjusted EBITDA (non-IFRS) | R$754.8 million | R$563.1 million |
| Cash flow from operating activities | R$630.9 million | R$371.5 million |
| Capital expenditures | R$276.8 million | R$137.6 million |
Revenue grew 43.1%, while gross profit rose 39.2% and operating income rose 21.3%. Net income fell 21.3%, primarily as finance expense increased to R$243.8 million from R$98.3 million. Adjusted EBITDA increased 34.1%; Afya’s operating cash conversion ratio was 100.8%, versus 75.7% in 2020. These are management-defined non-IFRS measures and are not substitutes for IFRS results.
Undergrad revenue was R$1,498.4 million, up 49.5%; Continuing Education revenue fell 31.9% to R$73.0 million; and Digital Services revenue was R$148.0 million, up 61.6% on the segment presentation that includes intercompany activity. Undergrad and Digital Services growth reflected acquisitions and organic expansion; Continuing Education was affected by fewer active paying students and postponed specialization plans.
Operating cash flow improved, but investing activities used R$1,274.1 million, mainly reflecting acquisitions. Financing activities provided R$364.7 million, including debt issuance, while Afya spent R$213.7 million on share repurchases. Cash and cash equivalents declined to R$748.6 million from R$1,045.0 million. Current assets were R$1,206.9 million and current liabilities R$766.5 million, yielding working capital of R$440.4 million, down from R$816.1 million.
At year-end, loans and financing were R$1,374.9 million, lease liabilities R$714.1 million, accounts payable to selling shareholders R$679.8 million and notes payable R$72.7 million. Management’s net debt measure, which includes these obligations and deducts cash, was R$2,093.0 million, compared with R$612.5 million in 2020. Contractual undiscounted obligations totaled R$4,425.2 million. The Series A preferred-share financing is classified as a financial liability under IFRS; it carries a 6.5% annual dividend and was recorded within loans and financing.
Total assets were R$6,447.4 million, including R$3,900.8 million of intangible assets. Total liabilities were R$3,447.4 million and total equity R$3,000.0 million. The company reported 61,118 undergraduate students and 85,938 students across its reported education categories at year-end.
Material changes versus prior comparable period
- Revenue increased by R$518.2 million, driven by seat maturation, higher average medical tuition, acquisitions and a full year of PEBMED revenue compared with roughly five months in 2020.
- Cost of services increased 50.1% to R$652.3 million, faster than revenue; as a result, gross margin declined. General and administrative expenses rose 54.6% to R$622.6 million, including higher acquisition-related, maintenance, marketing and payroll costs.
- Finance result worsened to a net expense of R$179.2 million from R$36.0 million. Management attributed the increase in finance expense to acquisition-related debt and seller payables, lease interest and foreign-exchange losses.
- Net income declined despite higher operating income. The report also identifies R$33.4 million of COVID-related mandatory tuition discounts in 2021 in its non-GAAP reconciliation; the audited note reports R$33.1 million net of prior-period recoveries.
- Cash balances fell as acquisition spending and capital investment increased. Net debt rose substantially, reflecting acquisitions and the Series A preferred financing.
Outlook, risks, contingencies and unusual items
- Outlook: Management said available cash and expected operating cash flows should fund ordinary working-capital needs and capital expenditures for the next 12 months. Afya budgeted R$293.5 million of capital expenditures for 2022 and expected to fund future needs through operating cash flow and debt or equity markets. It gave no numerical revenue or earnings guidance.
- Growth and execution: Strategy emphasizes medical-seat maturation, new campus openings, digital health expansion, cross-selling and further acquisitions. Management’s longer-term enrollment expectations depend on regulatory approvals, demand and successful integration; they are not assurances of results.
- Regulatory and student-financing exposure: Education operations depend on Ministry of Education authorization and quality requirements. FIES represented 8.0% of historical undergraduate tuition fees in 2021, and PROUNI participation provides tax exemptions subject to compliance. Changes to either program or loss of PROUNI benefits could affect revenue, cash flow or taxes.
- COVID-19: Campus lockdowns had disrupted in-person activities, and mandatory discounts and related lawsuits affected the business. By the report date, local restrictions had been lifted and classroom and practical classes had resumed. Afya nevertheless warned that renewed restrictions, student payment difficulties and further litigation could harm results.
- Acquisitions and accounting: 2021 business-combination consideration totaled approximately R$1,234.5 million. Acquired intangible valuations and goodwill involve assumptions about future growth and profitability. EY identified acquisition accounting as a critical audit matter, including valuation of R$861.0 million of identified intangible assets. Some 2021 acquisition valuations remained preliminary.
- Legal matters: Provisions for probable legal losses were R$148.3 million, including R$99.9 million for tax matters, R$25.5 million for labor and R$22.9 million for civil matters. Additional possible-loss matters without provisions totaled R$66.1 million. These estimates are uncertain.
- Other financial risks: Afya is exposed to Brazilian interest rates, inflation, real/U.S. dollar movements, student defaults and seasonal Digital Services revenue. The real depreciated 7.3% against the U.S. dollar during 2021. The company also disclosed related-party campus leases, including R$23.1 million of payments in 2021 to entities associated with a controlling shareholder.
- Audit and controls: EY issued unqualified opinions on the IFRS financial statements and internal control over financial reporting. The 2021 controls assessment excluded several businesses acquired during the year; management reported remediation of a prior IT general-controls material weakness.
Important facts for investors to verify
- How much of reported revenue and growth was organic versus acquired, and whether acquisitions are meeting integration, synergy and return targets.
- Whether cash generation can support the acquisition strategy, R$293.5 million 2022 capital-expenditure budget, debt service, lease commitments and seller payments without further material borrowing.
- The drivers of the decline in net income and margins, including continuing finance costs, acquisition-related amortization and the effect of higher Brazilian interest rates.
- The status and valuation sensitivity of goodwill and intangible assets, especially given acquisition accounting estimates and the concentration of intangible assets on the balance sheet.
- Developments in probable and possible legal claims, COVID-related tuition disputes, MEC authorizations, FIES and PROUNI requirements, and the related-party lease arrangements.
- The terms and cash cost of the Series A preferred shares, including cumulative dividends, conversion or redemption rights, and their effect on liquidity and common-share dilution.