When the 180-day lockup period for Afya Ltd. (AFYA) ends on January 15, 2020, pre-IPO shareholders and company insiders will be able to sell more than 13 million currently-restricted shares in the secondary market. With just 13.7 million shares trading pursuant to the IPO, any significant sales could flood the secondary market and cause a sharp, short-term downturn in share price.
Trading in AFYA has been mixed during this six-month period. The stock had a first day return of 26.8%. The shares climbed to a high of $32.32 on August 27, but then began a sharp decline reaching $21.90 on August 30. Currently, the stock trades between $27 and $28, a 43.9% return from IPO.
We believe that despite mixed trading, many of the pre-IPO shareholders and company insiders will be eager to cash in on some of their gains when the IPO lockup expires. Aggressive, risk-tolerant investors should consider shorting shares of AFYA before the company’s lockup expiration on January 15th.
Business Overview: Medical Education Group in Brazil
Afya Ltd. is the top medical education organization based in Brazil through December 2018 based on the number of medical school seats available. In its SEC filings, the organization describes itself as an end-to-end ecosystem designed to educate physicians and take them from education to residency preparation, graduation, and ongoing education requirements. The company uses interactive learning, integrated content, and adaptive experiences to encourage continuing education in the medical field. Through technology and its educational content, Afya offers personalized education that parallels one-to-one tutoring.
(Source: Afya website)
Afya has undergraduate and graduate programs across 12 states in Brazil. Its digital platform offers education across Brazil. As of March 31, 2019, Afya operates a network of 14 undergraduate and graduate campuses comprised of nine operating units versus five operating units in March 2018 and four operating units in December 2017. As of March 2019, they offered 1,167 medical school seats comprised of 917 operating seats and 250 approved seats. (Operating seats have been approved by the Brazilian Ministry of Education. Approved seats have approval by the Ministry of Education; however, they have not begun operations.) After acquisitions in Q2 of 2019, Afya has a total of 1,352 medical school seats and 16 operating campuses. Afya intends to expand to 23 campuses. In addition, Afya offers health care education programs in biomedicine, nutrition, physiotherapy, physical education, pharmacy, psychology, radiology, nursing, and dentistry. The company also offers degrees in pedagogy, industrial engineering, civil engineering, physical education, law, accounting, and business administration.
The company has approximately 2,700 employees and keeps its headquarters in Minas Gerais, Brazil.
Afya reported the following highlights for the end of the third quarter for fiscal 2019 ended September 30, 2019:
- Net revenue reached BRL 207 million for an increase of 124% versus the same period prior year.
- Revenue rose to BRL 530 million for an increase of 133% and reached BRL 609 million on a pro forma basis.
- Adjusted EBITDA was approximately BRL 81 million for an increase of 147% in the same quarter the prior year.
- Adjusted net income reached BRL 72 million for an increase of 155% in the third quarter of fiscal 2019.
Chairman of the Board Nicolau Carvalho Esteves has served in his position since June 2019. He is an orthopedist and has been Chair of Afya Brazil from August 2016. He has served in executive positions at ITPAC – Instituto Tocantinense Presidente Antônio Carlos S.A., ITPAC Porto Nacional – Instituto Tocantinense Presidente Antônio Carlos Porto S.A., IPTAN – Instituto de Ensino Superior Presidente Tancredo de Almeida Neves S.A., and Instituto de Educação Superior do Vale do Parnaíba S.A. He earned his medical degree from Faculdade de Medicina de Barbacena and a master’s degree in Business Administration from FEAD.
Director Renato Tavares Esteves has served in his position since June 2019. He has served in executive positions at Instituto de Educação Superior do Vale do Parnaíba S.A., IPTAN – Instituto de Ensino Superior Presidente Tancredo de Almeida Neves S.A., and Instituto de Ensino Superior do Piauí S.A. He earned a medical degree from Faculdade de Medicina de Barbacena.
Biographical information sourced from the company’s website.
Competition: Universidade de Sao Paolo, Federal University of Sao Paolo and Others
Brazil has a number of medical schools that compete with Afya including Federal University of Sao Paola, Universidade de Sao Paolo, Federal University of Minas Gerais, and Federal University of Rio Grande do Sul. In addition, many of the world’s top medical schools attract students from many countries. These include Harvard Medical School, John Hopkins University, Stanford University, and Columbia University.
Early Market Performance
The underwriters for Afya priced its IPO at $19. The stock had a first day return of 26.8%. It reached a high of $32.32 on August 27 only to drop sharply to $21.90 on August 30. AFYA currently has a return from IPO of 43.9%.
Conclusion: Short Shares of AFYA ahead of Lockup Expiration
When the AFYA IPO lockup expires on January 15th, pre-IPO shareholders and company insiders will be able to sell more than 13 million currently-restricted shares. We believe that these pre-IPO shareholders and company insiders will be eager to cash in on some of those gains since AFYA has a return from IPO of nearly 44%.
When the currently-restricted shares are unlocked, there is a potential for these shares to flood the secondary market for AFYA and cause a sharp, short-term downturn in share price. Aggressive risk-tolerant investors should consider shorting shares of AFYA ahead of the IPO lockup expiration. Interested investors should cover short positions during the January 16th and 17th trading sessions.
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Disclosure: I am/we are short AFYA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.