Anhanguera Educacional S.A. CFA Investment Research Challenge - - PowerPoint PPT Presentation

CFA Investment Research Challenge

Anhanguera Educacional S.A.

December 3rd, 2011

Team: Insper Type: Partial Presentation1

Note:

• 1. This is only a preview. This presentation wiil suffer changes until the presentation day (12/06/2011)

18.05

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Introduction

Anhanguera’s stock history1 and target price

Based on a DCF model, we rate Anhanguera with a buy recommendation

Source: Bloomberg / INSPER student’s estimates

Upside 72% Target Price: R$ 31 BUY Rating

Note:

• 1. Data until 12/02/2011

SECTION 1 SECTION 2 SECTION 3 SECTION 4 SECTION 5

Education Sector’s Drivers Anhanguera’s Business’ Drivers Financial Analysis Valuation Risks

Contents

4 7 12 16 20

Disclaimers

24

SECTION 1

Education Sector’s Drivers

82% 75% 67% 59% 52% 27% 23% 20%

1 2 3 4 5 6 7 8

1.1 Penetration Rate on Post Secondary Education

Education in Brazil is a promissing sector, with large future growth possibilities

Brazilian education sector offers a huge growth opportunity

Source: SEMESP

Post Secondary Penetration Rate (%)1 Penetration of Post Secondary Education in Brazil (%)1

• 1. Education Sector’s Drivers

77% 35% 9% 3%

A B C D/E

There’s a large educational gap in Brazil to be fulfilled...

• Avg. 51%

Underpenetration mainly due to middle and low class ...and we believe FIES and Brazil’s GDP growth are crucial factors to

diminish it

Note:

• 1. Data from 2008

Source: Hoper Consultoria

1.2 GDP Growth and FIES

The two main drivers to develop the educational sector

Sectors Elasticities

For those reasons, education sector shows great potential for growth

Brazil’s GDP Growth FIES Effects

1.6x

1.3x 1.3x 1.1x 1.1x 1x 0.7x Education Transportation Healthcare Culture &… Personal Expenses Housing Food

1

Enrollments growth

2

Dropouts decrease

3

Delinquency minimized 4.2% 3.7% 3.8% 07 - 10 11 - 15e 16 - 20e

Having a high elasticity, the Brazilian educational sector will benefit from the robust future economic growth... ...while FIES will also help to boost enrollments, reducing dropouts and delinquency

Source: Company’s Data

FIES Eligibility

Course materials aproved by regulators Quality test scores above 60% Family income below 2 minimum wages Pay a fraction of the course while enrolled

Entertaiment

• 1. Education Sector’s Drivers

Source: SEMESP Source: Bacen / LCA Consultores

SECTION 2

Anhanguera’s Business’ Drivers

2.1 Anhanguera’s Business Drivers Overview

Anhanguera’s three competitive advantage pillars

2007 – 2010 Comparative Enrollment (‘000) Anhanguera’s Competitive Advantages

Price and Quality

• Lower comparative tuition price
• Greater comparative quality

Distance Learning Centers

• Broader target audience
• Greater economies of scale

Acquisition and Integration Teams

• Great acquisition track record
• 5 - year margin integration with AEDU’s standards

1 2 3

• 2. Anhanguera Business Drivers

57 175 18 358 248 94

1 2 3

CAGR 130% CAGR 12% CAGR 73% 07’ 10’ 07’ 10’ 07’ 10’

Source: Companies’ Data

...mainly due to three competitive advantages: lower price and high quality, DLC’s participation and acquisitions Anhanguera is able to deliver a higher enrollment growth compared to its peers...

Anhanguera stands out among its peers, making it the sector’s top choice

• Economies of scale
• Partnerships with quality suppliers
• Standardized course structure
• Teachers’ salary based on ENADE results

288 386 536

1 2 3

2.2 Price and Quality

Anhanguera has the best quality and the greatest affordability compared to its peers

Average Tuition Price (BRL) National Student Performance (ENADE)

2.86 2.69 2.67

1 2 3

• 2. Anhanguera Business Drivers

2.65 2.7 2.75 2.8 2.85 2.9 150 300 450 600

ENADE scores Tuition

Despite having the lowest tuition, Anhanguera offers a better service when compared to its peers... Comparative Quality and Price

Price and Quality ...This results in the

competitive advantage of having the best quality to cost ratio

Source: Companies’ Data Source: Companies’ Data

2.90 2.85 2.80 2.75 2.70 2.65

Greater Performance Lowe Price

Anhanguera is able to offer the best of both worlds to its customers

Campus Distance Learning Center

42% 16% 4%

1 2 3

2.3 Distance Learning Centers

Distance Learning Center is one of Anhanguera’s engine

Great convenience delivering high margins

Percentage of Total Students on DLCs

Target Audience

42-48 36-42 30-36 24-30 18-24 12-18 12 and under

48+ Distance Learning Centers Characteristics

• Wider target audience
• Higher margins
• Located in cities with less than 100,000 inhabitants
• Hybrid program (students attend centers once a week)

Distance Learning Centers have a wider target audience because

• f its greater

convenience... ...And have a higher gross margin (55%), due to its great cost dillution

• 2. Anhanguera Business Drivers

41% 55%

2010 Campus 2010 Distance Learning

Comparative 2010 Gross Margin

Source: Companies’ Data

227 66 57

1 2 3

2.4 Acquisitions

M&A Team deliver great execution with fast integration of acquired units

Number of Students Acquired (‘000)

Acquisition and Integration teams are valuable assets to the company

Acquisition EBITDA Margin Evolution Anhanguera’s Expected Acquisition Targets1 Acquisitions track record explicits the efficiency of the execution team... ... And the margins evolution shows an able integration team

Source: Companies’ Data

10% 17% 23% 27% 30% Year 0 Year 1 Year 2 Year 3 Year 4 Year 5

Source: Insper Student’s Estimates Note:

• 1. Ilustrative view. Targets not precisely positioned.

Source: Insper Student’s Estimates

SECTION 3

Financial Analysis

3.1 Revenue Model

Those 4 channels deliver our expected revenue rise

Anhanguera’s 4 enrollment growth channels

Net Revenue (BRL Million) Anhanguera’s Enrollment and Capacity Channels 1 2 3 4

112 1,558 3,468 4,236

2006 2011E 2016E 2021E

CAGR 69% CAGR 17% CAGR 4%

• 3. Financial Analysis

Source: Company’s Data

Acquisitions

• Great acquisition track record

Greenfields

• Projection of 7 new campuses in the next years

Campus’ Organic Growth

• FIES and GDP growth support this channel

Distance Learning Centers’ Organic Growth

• Broader target audience

Revenue growth sustained by enrollment increase... ...Since we forecast Anhanguera’s tuition using just the inflation rate

4 channels sustaning a high growth on Ananguera’s student base

Acquisitions (‘000)

Anhanguera is expected reach its 2016 guidance of 750k students

Campuses’ Enrollments (‘000) Number of Campuses Distance Learning Centers’ Enrollments (‘000) 235.5 180

06' - 10' 11' - 15' 16' -22'

22 58 60 65

07' 11' 16' 22'

• 3. Financial Analysis

4 145 250 280

2007 2011 2016 2022

53 265 500 528

2007 2011 2016 2022

Source: Company’s Data / Insper student’s estimates

3.2 Enrollment Growth Channels

Anhanguera’s historycal growth has been

• utstanding...

... and we expect a a smaller, but still worthy growth to the future

CAGR 49% CAGR 17% CAGR 2% CAGR 145% CAGR 14% CAGR 3% CAGR 27% CAGR 1% CAGR 1%

188 235 328 381 501 584 705 818

2009 2010 2011E 2012E 2013E 2014E 2015E 2016E

16% 18% 20% 22% 24% 26% 28%

2009 2011E 2013E 2015E

3.3 Projected EBITDA and EBITDA Margin

Margin growth will sustain our expected EBITDA growth

Increases in margins sustain expected EBITDA growth

EBITDA Margin Evolution EBITDA (BRL Million)

Low margin acquired units

• M&A Integration
• Campuses Maturation
• 3. Financial Analysis

Source: Company’s Data / Insper student’s estimates

Initial decrease in EBITDA margin, due to inefficient acquired units... ... Next, acquisitions integration and campuses maturation sustain a 4 percentage points expansion

Forecast

SECTION 4

Valuation

4.1 How to Finance Growth?

Three main variables financing Anhanguera’s expansion

CAPEX (BRL Million) Net Debt / EBITDA Cash and Cash Equivalents (BRL Million)

• 1.6x
• 1.2x
• 0.4x
• 0.2x
• 0.4x

0.0x 0.2x

2010

• 4. Valuation

959 864 577 566 631 403 205 2010 2011E 2012E 2013E 2014E 2015E 2016E 2010 2011E 2012E 2013E 2014E 2015E 2016E

Acquisitions Maintanence and Expansion Source: Company’s Data / Insper student’s estimates

2010 2011E 2012E 2013E 2014E 2015E 2016E 139 425 550 285 346 268 305 Forecast F F

Acquisition CAPEX are high on the first following years due to acquisition... ...and are mainly financed with cash

4.2 Weighted Average Cost of Capital

Cost of Equity

Risk Free Rate1 (US$)

3.5%

Country Risk Premium2 (US$)

2.0%

Market Risk Premium3 (US$)

5.0%

Beta4 1.20

Cost of Debt

Cost of Debt Before Taxes5 (BRL) 12.5% Cost of Equity (BRL) 14.7% WACC (BRL Nominal) 14.0% 80% 20% Tax Rate 8% Cost of Debt After Taxes (BRL) 11.5%

• 4. Valuation

WACC’s Breakdown

Notes:

• 1. Based on the American 10 year T-bond – Source: Bloomberg
• 2. Based on the JPM EMBI+ Brazil – Source: JPM Hub
• 3. Based on the historical difference between the S&P returns and the American 10 year T-bond – Source: Bloomberg
• 4. Based on the average beta of comparable companies – Source: Bloomberg / Insper Student’s Estimates
• 5. Based on the weighted average of Anhanguera’s nominal rate debt – Source: Company Data / Insper Student’s Estimates

4.3 Results From DCF Valuation

Considering a 14% WACC and a 5.5% nominal perpetuity growth

Free Cash Flow to Firm (R$ Million) Value of Discounted Cash Flow Target Price Sensibility (BRL)

Perpetuity Growth (%) - R$ Nominal WACC (%) - R$ Nominal

4.50% 5.00% 5.50% 6.00% 6.50% 13.0% 34.7 35.5 37.1 38.9 41.0 13.5% 31.5 32.7 34.0 35.6 37.7 14.0% 29.2 30.2 31.4 32.7 34.1 14.5% 27.1 28.0 29.0 30.1 31.4 15.0% 25.3 26.1 26.9 27.9 28.9

• 4. Valuation

Present Value of Free Cash Flow (BRL Million) 1,811 Present Value of Terminal Value (BRL Million) 2,799 EV (BRL Million) $4,611 (-) Net Debt (BRL Million) 44 Equity Value (BRL Million) 4,566 # Shares (Millions) 146 2012 Target Price (BRL) 31 Current Stock Price (BRL) 18 Upside 72%

Source: Company’s Data / Insper student’s estimates

Discounted cash flow results in a 2012 BRL 31 target price for Anhanguera.

FCFF (BRLmn) 2009 2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E EBITDA 188.4 235.5 328.5 381.1 501.8 584.8 705.8 818.5 921.3 992.9 1,067.2 1,181.1 1,262.8 1,311.5 (-) D&A

• 27.8
• 34.6
• 67.5
• 83.6
• 83.7
• 95.2
• 91.6
• 86.5
• 94.2
• 99.6 -105.0 -110.6 -116.4
• 122.2

EBIT 160.6 200.9 261.0 297.4 418.0 489.6 614.3 732.0 827.1 893.3 962.1 1,070.5 1,146.5 1,189.3 (-) Tax

• 12.8
• 16.1
• 20.9
• 23.8
• 33.4
• 39.2
• 49.1
• 58.6
• 66.2
• 71.5
• 77.0
• 85.6
• 91.7
• 135.1

NOPAT 147.8 184.8 240.1 273.6 384.6 450.4 565.1 673.5 760.9 821.9 885.2 984.9 1,045.8 1054.2 (+) D&A 27.8 34.6 67.5 83.6 83.7 95.2 91.6 86.5 94.2 99.6 105.0 110.6 116.4 122.2 (-) CHG in NWC

• 78.2
• 49.3
• 90.6
• 59.2
• 91.4
• 80.8 -101.9
• 94.5
• 37.7
• 39.2
• 40.0
• 51.8
• 42.4
• 92.0

(-) CAPEX

• 108.8 -139.7 -425.8 -550.8 -285.3 -346.7 -305.6 -268.1 -247.0 -188.5 -196.1 -204.1 -211.8
• 122.2

FCFF

• 11.4

30.4 -208.8 -252.7 91.6 118.2 249.2 397.3 570.4 693.8 754.1 839.6 916.9 962.2

SECTION 5

Risks

4.1 Risks Oveview

Risks and affected variables

From the six risks presented above, we highlight: receivables, FIES and acquisition

Receivables Macro FIES Tax Incentives Acquisitions Management

Anhanguera’s Main Risks

Receivables

• Cash position weakened
• M&A capability diminished

FIES

• Decrease in enrollment growth
• Increase in dropouts

Acquisition

• Guidance not achieved
• Rise in Capex

1 2 3

Risks

Source: Insper student’s estimates

• 5. Risks

Disclaimers

Ownership and material conflicts of interest: The authors, or a member of their household, of this report do not hold a financial interest in the securities of this company. The authors, or a member of their household, of this report are not aware of the existence of any conflicts of interest that might bias the content or publication of this report. Receipt of compensation: Compensation of the authors of this report is not based on investment banking revenue. Position as an officer or director: The authors, or a member of their household, do not serve as an officer, director or advisory board member of Anhanguera. Market making: The authors do not act as a market maker in shares of Anhanguera. Rating guide: Banks rate companies as either a BUY, HOLD or SELL. A BUY rating is given when the security is expected to deliver absolute returns of 15% or more over the next twelve-month period, and recommends that investors take a position above the stock’s weighting in the IBOVESPA or any other relevant index. A SELL rating is given when the security is expected to deliver negative returns over the next twelve months, while a HOLD rating implies flat returns over the next twelve months. Disclaimer: The information set forth herein has been obtained or derived from sources generally available to the public and believed by the authors to be reliable, but the authors do not make any representation or warranty, express or implied, as to its accuracy or

• completeness. The information is not intended to be used as the basis of any investment decisions by any person or entity. This

information does not constitute investment advice, nor is it an offer or a solicitation of an offer to buy or sell any security. This report should not be considered to be a recommendation by any individual affiliated with CFA Society of Brazil, CFA Institute or the CFA Institute Research Challenge with regard to this company’s stock..