|Expanding the classroom|
After raising half a billion reais on the stock exchange and gaining GP as partner, Estácio de Sá focuses on expansion
The number is cruel: there are 14.1 million illiterate people in Brazil. The high number of people unable to read or write means that the country has one of the worst levels of illiteracy in Latin America, after Bolivia, Suriname and Peru. The numbers come from the National Household Sample Survey (Pnad) and refer to 2007. There is something curious and interesting here: in June 2007, a university education network in Rio de Janeiro passed their hats to investors and raised a little over half a billion reais. It was the launch of Estácio Participações in the stock exchange.
The company, which had been a non-profit institution and changed status before the offer of shares, recently drew attention once again. In May, while world markets were already deteriorating due to the American crisis, GP Investimentos – which recently sold its position in ALL, whose shares were a negative highlight in this sector – decided to invest in Estácio. It paid a premium of 15% over the share price and bought 20% of the company for R$ 259 million. But was it not absurd to invest in a university education company in a country of illiterates?
It depends. The answer is yes, if the investor has a short-term perspective. In the long-term, with the world markets less unpredictable, the situation could be very different. Today, Estácio Participações is already a “small cap” full of luster. In the six months between March and September, its shares rose 47%, making clear that this company, despite its reduced liquidity , is doing very well for a newcomer to the stock exchange, especially during a time of crisis. It was exactly this performance that brought it a highlight in the Lente de Aumento [Magnifying Glass] section, which follows the rise and fall of the capital markets.
Analysts from the seven financial institutions that cover the company are unanimous in recommending the purchase of Estácio Participações shares. The lowest target price forecasted is R$ 31.10, from Unibanco. The highest target, R$ 50, is from UBS. For now, the values are still below the banks’ expectations: the share closed October at R$ 13.85, well below the IPO price of R$ 22.50.
“It is a well-rounded company with high cash flow, small liabilities and good perspectives”, said analyst Marco Saravalle, of Coinvalores. He forecasts shares at R$ 32, and said that the company has performed surprisingly well. “At first, Estácio Participações gave the impression of being a late company, however, soon after GP entered, it joined the Novo Mercado (the highest corporate governance level on the Bovespa) and has been showing signs that it will reduce costs and become more agile.” The well-known GP management style, which always puts profit first, was translated into Estácio Participações share prices. It is one of the companies that have accumulated the greatest rise on the Bovespa this year.
Expectations surrounding the Rio de Janeiro based company – which started as a law school founded by the very low-key Uchoa Cavalcanti family – are supported by precisely what seems to be, at first, contradictory: the power of education in Brazil. Despite still having one of the worst literacy rates in Latin America, illiteracy in Brazil has been progressively decreasing since 1997. Brazil has Latin America’s largest higher education market and is the fifth biggest in the world as measured by the number of enrolled students, according to Unesco, MEC and Inep data cited in a broad and detailed report by Coinvalores.
Although the company, and the world, still face an uncertain future, it is important to stress that the development of the middle class makes all the difference to private education companies. This is especially so as the Brazilian Classe C (a local classification roughly corresponding to lower middle class on a scale from A to E with A being the wealthiest), which now has more money and access to credit, for the first time has become a majority of the population. This has led them to seek out private education. Currently, 76% of university students are in private institutions. The number of spaces in public institutions has grown moderately - from 1.4 million to 1.5 million last year - whilst spaces in private networks, in compensation, have increased from 4.4 million to 4.7 million.
Estácio, consisting of two university centers and 16 schools that have 68 campuses all together, reported approximately 192,800 enrolled undergraduates. It is one of the biggest in the country, rivaling Anhanguera Educação - the first education network to appear on the Bovespa. Both are focused on university and vocational courses. “The profile of these students offers a low default risk as, generally speaking, they are people who work by day and study by night and have their studies subsidized by their employers”, says Saravalle.
Perhaps this is why Estácio Participações has been able to present strong growth in its balance sheets. In the second quarter, it increased its net profit by 19% to R$ 3.7 million, in comparison to the same period the previous year. This net gain has already been discounted for the effects of the amortization of acquisition premiums. If weren’t for this adjustment, profits would have risen to R$ 9.3 million. Since it went on the stock exchange, the company has satisfied its desire for expansion. It has made ten acquisitions among colleges and universities. All the signs are that Estácio wants more.