Yduqs (YDUQY, Financial), formerly known as Estacio, is the second-largest Brazilian for-profit education company. The Brazilian government is slow to build new colleges, and thus pro-profit schools are where many people must turn. As the fragmented industry keeps consolidating, Yduqs has been buying rivals.
As of Dec. 23, the stock has 300 million shares trading for 46.2 Brazilian reias (BRL) each for a market cap of BRL 13.86 billion ($3.4 billion USD). Earnings per share are BRL 2.0 and the price-earnings ratio is 23.1.
Revenues grew from BRL 2.9 billion in 2015 to BRL 3.6 billion over the last twelve months. Good top line growth and earnings followed too; earnings grew from BRL 485 million to BRL 604 million over that time frame. Outstanding shares fell by about 10 million, meaning that current shares are not being diluted.
Yduqs has a profit margin was 16.83% with free cash flow of BRL 561 million. The balance sheet shows BRL 866 million in cash and BRL 715 million in receivables. The liability side only shows BRL 141 million in payables and no debt.
In the third quarter of 2019, enrollment grew 8.4% to 575,000 undergrad students and 10% to 495,300 for grad students. When I met with management earlier this year, they told me that they had a big push for online education, which it calls Distance Learning. It looks like they have been very successful with this. The number of online courses has grown from 40 to 83 since 2017, while the number of Distance Learning students grew from 95,000 to 148,000 over that time frame. The Brazilian Department of Education recently allowed a big increase in distance learning, and several education stocks in the sector jumped when the news was announced.
Brazil has cut its student loan program as the government is trying to watch expenses, further contributing to the growth of the for-profit education sector.
Yduqs recently purchased Adtalem, a workforce solutions provider, for $470 million. The deal will be financed from cash and a debt offering. The company put up BRL 875 million in revenues. A testing center named UniToledo was also purchased in September.
My visit to Estacio
I will tell you a little bit about my visit with Estacio’s IR team back in January of this year. Yduqs is a for-profit school. Unlike in the United States, for-profit schools are more common in Brazil because the country cannot build enough new public schools. Catholic schools are considered especially prestigious. The industry is very fragmented with lots of small players, some of the largest being Kroton (KROTY) with 9.2% of the industry and Estacio with 6.2%. Kroton is changing its name to Cogna, just like Estacio has changed its name to Yduqs.
Yduqs is pushing its Distance Learning in part because Brazil is such a large country and there are so many small cities. Students can learn online and take tests at centers in regional cities. When we wrote about Estacio earlier in the year, its stock was BRL 29.65. The stock is up 56% since then, though the reais has depreciated from 3.68 to 4.06 against the USD during the same time frame.
Buy or no buy?
What I like about Yduqs is that it is in part of the education sector that will greatly improve the lives of the Brazilians (those who can afford the tuition, at any rate). The profit margins are high, the industry is consolidating and the growth potential is there. The Brazilian stock market is up a lot this year, even though the reias itself has been pretty weak.
What concerns me about investing in Brazil is that it struggles with corruption and many other issues. Prominent public figures such as the President of Brazil have gotten into a lot of trouble for bribery. I was very bullish on Brazilian education when I got back from my trip in January, and a few months ago, I was going over notes from a value investing conference that I attended ten years ago. One of the speakers was even bullish on Brazilian education. I like the industry and Yduqs, though keep in mind that investing in Brazil has its perils.
Disclosure: We don't own stock of the companies mentioned.
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