White Brook Capital: “Afya Limited (AFYA) will Expedite Value Creation”

Investment Management Company White Brook Capital published its second quarter investor letter, a copy of which can be downloaded here. The fund’s NAV decreased by -18.17% year to date. The fund’s portfolios are diversified across industries and year to date the top contributors were the material sector.  To see its finest picks for 2022, check out the top 5 holdings of the fund.

In the Q2 2022 investor letter, White Brook Capital analyzed the market and provided future challenges and opportunities. The fund holds Afya Limited (NASDAQ:AFYA), a medical education group headquartered in Nova Lima, Brazil, and has a market capitalization of $942.255 Million. The stock of Afya Limited (NASDAQ:AFYA) closed at $9.66 per share on July 27, 2022. Afya Limited (NASDAQ:AFYA) had a return of 15.07% for the past month, whereas its 12-month returns plunged to – 42.22%.

Here is what White Brook Capital specifically said about Afya Limited (NASDAQ:AFYA) in its Q2 2022 investor’s letter:

“The Fund also owns a position in Afya Limited (NASDAQ:AFYA). Afya provides medical education in Brazil and trades on the NASDAQ. ~80% of the business, by revenue, is generated by operating for-profit undergraduate medical schools. This is a ~50% margin, 100% occupancy business that grows its student base 3-7% a year, and has pricing power similar to top private universities in the United States. Afya provides 8% of all of Brazil’s medical seats. Unlike US for-profit schools and top private non-profit schools, 97% of Afya’s graduates find employment and are able to make back their tuition within 5 years. There are significant barriers to entry, with the Brazilian health ministry certifying each school that’s built and awarding each new seat. Public schools are also available, are hard to get into, and are free to those that are accepted, although those facilities are considered somewhat lacking compared to Afya’s technology forward schools. Brazil is also under-doctored, with only 2.4 doctors per thousand people vs 3.5 per thousand people in OECD countries. This is a great business.

Another ~10% of revenue is a lower but still solid 30% margin business, where Afya provides residency and medical specialization programs. Programs are offered both online and in-person. During the epidemic the Company cut the pricing of its largest online prep offering, harming margins, and doctors felt the in-person classes weren’t worth the risk of contracting Covid. All types of classes are now being attended, and my expectation is for the business to bounce back this year.

The remaining portion of the business is a collection of currently unprofitable SaaS businesses that help doctors run their practices, digitally prescribe medications, treat patients, and connect service providers with physicians. Fundamentally this is a good idea. Doctors are not generally trained in running their offices or maximizing their economic opportunity. Afya’s services aim to help their doctors and the wider community solve this need. Each of the offerings is generally the number 1 or number 2 provider, but the segment suffers from many of the issues of the small-cap US tech sector – the total addressable market size is uncertain, the competition is significant, and it’s unclear how profitable they can be. Afya has deployed significant amounts of excess capital to build this segment in a relatively short period of time – it’s unclear it has been a good use of capital. At the beginning of the year they changed leadership of the segment, and checks indicate new leadership is more operationally focused than the last..(Click here to view the full text)”

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Our research shows that Afya Limited (NASDAQ:AFYA) is not on our list of 30 Most Popular Stocks Among Hedge Funds. Afya Limited (NASDAQ:AFYA) was in 8 hedge fund portfolios at the end of the first quarter of 2022, compared to 6 in the previous quarter. Afya Limited (NASDAQ:AFYA) shares lost 54.81% of their value over the last 52 weeks.

We published an article in June on Afya Limited (NASDAQ:AFYA). In addition, please check out our hedge fund investor letters Q2 2022 page for more investor letters from hedge funds and other leading investors.

Disclosure: None. This article is originally published at Insider Monkey.