Afya Limited — FY2019 Form 20-F
Reporting period: Year ended December 31, 2019; filed April 20, 2020. This is an annual report, not a standalone Q4 earnings filing. Afya is a Cayman Islands holding company whose operations are primarily in Brazil. Financial statements are audited and prepared under IFRS, with Brazilian reais (R$) as the functional and reporting currency. U.S. dollar figures are convenience translations and may not reflect actual exchange rates.
Business context
Afya provides medical and health education, including undergraduate and graduate programs, residency-preparation courses, and digital educational content. Growth in 2019 reflected both organic expansion and acquisitions; acquired businesses are included only from their respective closing dates, limiting comparability with prior years.
Financial and operating performance
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Net revenue | R$750.6m | R$333.9m | +124.8% |
| Gross profit | R$441.8m | R$165.9m | +166.3% |
| Operating income | R$205.3m | R$96.4m | +112.8% |
| Net income | R$172.8m | R$94.7m | +82.4% |
| Operating cash flow | R$299.2m | R$80.3m | — |
| Adjusted EBITDA (non-IFRS) | R$293.7m | R$119.9m | — |
| Operating cash conversion ratio (non-IFRS) | 96.5% | 71.7% | — |
Gross margin was approximately 58.9%, versus 49.7% in 2018; operating margin was approximately 27.3%, versus 28.9%; and net margin was approximately 23.0%, versus 28.4%. Cost of services fell to 41.1% of revenue from 50.3%, while general and administrative expenses rose 241.4% to R$239.1m, reflecting acquisitions, integration costs, and higher doubtful-account provisions. Adjusted EBITDA and cash-conversion measures are management-defined non-IFRS metrics and may not be comparable with other companies.
Cash and cash equivalents were R$943.2m at year-end, with restricted cash of R$16.8m. Current assets were R$1,111.8m and current liabilities R$333.2m. Cash flow from investing was negative R$354.1m, primarily reflecting acquisitions and capital spending; financing cash flow was positive R$921.4m, largely due to the IPO. Capital expenditures were R$121.7m in 2019; management budgeted R$100.3m for 2020.
Loans and financing totaled R$60.4m and lease liabilities R$284.5m at year-end. Accounts payable to selling shareholders for acquisitions were a further R$300.2m. The company reported net cash of R$314.9m under its capital-management calculation, which includes loans, leases, and seller payables, less cash and restricted cash. Undiscounted contractual lease payments totaled R$704.3m.
Students across all segments totaled 38,360 at year-end, compared with 19,720 in 2018. Undergraduate students numbered 23,969; operating medical seats were 1,222, with 1,572 approved seats. Historical combined undergraduate tuition fees reached R$794.3m, but this management metric is not IFRS net revenue.
Material changes and unusual items
- Net revenue more than doubled, substantially reflecting acquisitions as well as organic growth. Management attributed approximately 62% of 2019 revenue growth to acquisitions and 39% to organic growth; rounding may account for the total differing from 100%.
- Afya consolidated Medcel in March 2019, entered medical specialization through IPEMED, and acquired FASA and IPEC, among other transactions. The 2019 results include acquired operations only from closing dates.
- IFRS 16 was adopted January 1, 2019, adding R$212.4m of right-of-use assets and lease liabilities at transition. Year-end lease liabilities were R$284.5m; lease interest expense was R$31.5m. This affects comparability with 2018.
- The July 2019 IPO generated R$913.1m in net proceeds in the audited financial-statement note; financing cash flows report IPO proceeds of R$992.8m before share issuance costs. The company reported R$943.2m in cash at year-end.
- Finance result changed from net income of R$2.3m in 2018 to net expense of R$20.7m in 2019, including acquisition-related interest and IFRS 16 lease interest. Net income therefore grew more slowly than revenue.
- Management reported a 2019 effective income-tax rate of 7.58%, substantially below the 34% statutory rate, largely due to PROUNI tax benefits.
Outlook, risks and contingencies
No specific financial revenue or earnings guidance is provided. Management planned to open seven awarded “Mais Médicos” campuses by 2021, subject to regulatory requirements, and described medical-seat maturation as a source of future growth. The report gives differing timing estimates for reaching approximately 12,059 medical students at maturity (2025 in one discussion and 2026 in another), which investors should reconcile. UniRedentor was acquired on January 31, 2020 for R$225m; the planned UniSL acquisition, with a stated price of R$341.6m, remained subject to closing conditions and antitrust approval.
COVID-19 is a significant subsequent-period uncertainty. On-campus activities were interrupted from March 17, 2020; non-practical instruction moved temporarily online and practical activities were rescheduled. Management said it could not predict the pandemic’s eventual effects on tuition collection, student attrition, cash generation, acquisitions, or asset recoverability; no material financial-statement adjustment had been identified at the time of the report.
Key risks include Brazilian economic and currency volatility, education regulation and MEC approvals, dependence on medical tuition, student payment delays and government financing or tax programs, acquisition integration, and pandemic-related disruption. The filing gives inconsistent FIES exposure indicators: 9.4% of historical undergraduate tuition fees in the risk discussion, but 2.3% of total revenue and 2.0% of the student base in the business overview. Management also reported ineffective disclosure controls and material weaknesses in internal control over financial reporting, citing accounting resources and IT general controls; remediation efforts were underway.
Provisions for probable legal losses were R$5.3m; possible-loss proceedings totaled R$50.3m, for which no provision was recorded. A public civil proceeding involving the chairman could, if adverse, affect access to tax benefits and education programs. The company also disclosed related-party campus and office leases, with R$15.8m of lease payments in 2019. The Esteves family and Crescera controlled approximately 93.8% of voting power through high-vote Class B shares.
Important facts for investors to verify
- Separate organic growth from acquired revenue and assess whether acquisition integration delivers expected returns.
- Reconcile FIES exposure figures and evaluate the sensitivity of collections and enrollment to student finances and government-program changes.
- Review cash-flow quality, acquisition consideration due to sellers, lease commitments, and the basis for management’s net-cash calculation.
- Track COVID-19 effects on campus operations, tuition delinquency, attrition, and the 2020 capital-spending plan.
- Monitor remediation of reported internal-control material weaknesses and the effectiveness of disclosure controls.
- Confirm regulatory approvals, opening schedules, and seat capacity for planned campuses and acquisitions, including the differing maturation-date estimates.
- Assess related-party lease terms, the chairman-related proceeding, and the implications of concentrated voting control.