Executive Summary / Key Takeaways

• Regulatory Moat with 100% Occupancy: Afya controls 3,753 approved medical seats in Brazil's tightly regulated market, where the Ministry of Education (MEC) strictly limits new medical school capacity, creating a defensible monopoly that maintains 100% occupancy despite increasing competition.

• End-to-End Physician Ecosystem: The company's three-segment structure (Undergraduate, Continuing Education, Medical Practice Solutions) captures the entire physician lifecycle, creating multiple monetization points per doctor and generating 65% B2B revenue growth in Continuing Education as the ecosystem reaches 300,000 active users.

• Margin Expansion Through Operational Discipline: Despite a challenging regulatory environment and OECD Pillar Two tax headwinds, Afya expanded EBITDA margins by 200 basis points to 46.4% through zero-cost budgeting, segment restructuring, and digital platform optimization, demonstrating pricing power and operational leverage.

• Tax and Regulatory Execution Risk: The implementation of Brazil's 15% minimum tax rate under OECD Pillar Two threatens to eliminate PROUNI program benefits, potentially increasing the effective tax rate from 9.7% to 15% and reducing net income by approximately 5-6% if legal challenges fail.

• Undervalued Relative to Moat: Trading at 6.54x EV/EBITDA versus education peers at 12-15x, the market appears to undervalue Afya's regulatory monopoly, 101.5% cash conversion, and clear path to 200+ seat annual M&A, creating potential upside if execution remains strong.

Setting the Scene: Brazil's Medical Education Gatekeeper

Afya Limited, founded in 1999 and headquartered in Nova Lima, Brazil, operates as the country's leading medical education group by exploiting a structural regulatory advantage. The Brazilian government strictly controls medical school seat authorizations through the Ministry of Education, requiring substantial capital investment, accredited faculty, and clinical partnerships that create insurmountable barriers for new entrants. This regulatory moat explains why Afya can maintain 100% occupancy across its medical programs while capturing 18.7% of Brazil's private medical education market.

The company's business model spans the entire physician lifecycle through three integrated segments. Undergraduate medical education generates 86% of its segment revenue from medical students, with 94% from broader health-related courses. Continuing Education captures physicians through residency preparation and graduate programs. Medical Practice Solutions provides clinical management and decision software that engages over 300,000 physicians and medical students. This ecosystem approach creates powerful network effects: students who train in Afya's undergraduate programs naturally flow into its continuing education courses and ultimately adopt its practice management tools, generating three distinct revenue streams from a single customer relationship.

Industry dynamics favor Afya's consolidation strategy. Brazil faces a severe physician shortage, with demand for healthcare professionals projected to grow substantially through 2035. The country's strained public healthcare system enhances the value of private medical education, while the ENAMED exam rollout in 2025 increases quality scrutiny, favoring established institutions with proven track records. Unlike generalist education peers Yduqs (YDUQ3) and Cogna (COGN3), which dilute their focus across business and engineering programs, Afya's medical specialization commands premium pricing and generates superior margins.

Technology, Products, and Strategic Differentiation

Afya's digital transformation represents more than a technology upgrade—it restructures how the company captures and monetizes physician data. The April 2024 transition from the PEBMED portal to the Afya portal initially reduced monthly active users from 249,000 to 228,000, but this was intentional. By restricting sign-ups to gather more detailed user information, Afya built a richer dataset for B2B pharmaceutical partnerships, driving a 65% increase in B2B continuing education revenue. The short-term user loss directly enabled long-term monetization, illustrating management's willingness to sacrifice vanity metrics for value creation.

The clinical decision software (White Book) price increase at year-end 2024 eliminated freemium users but boosted B2P revenue by 11% to BRL 114 million. This strategic pruning demonstrates pricing power in a competitive landscape where residency prep programs face intense pressure. Afya is now reviewing its freemium-to-premium feature mix to resume audience growth while maintaining premium pricing, a delicate balance that will determine future market share in the digital health tools space.

iClinic, the clinical management software, is accelerating penetration faster than expected despite competition from established medical records systems. By embedding AI features into both White Book and iClinic, Afya enhances physician efficiency and accuracy, creating switching costs that generic platforms cannot match. The integration of these digital tools with Afya's physical campuses creates a hybrid advantage that pure digital players like Vitru (VTRU3) cannot replicate, while generalist peers like Yduqs lack the medical-specific functionality to compete effectively.

Financial Performance & Segment Dynamics: Evidence of Pricing Power

The undergraduate segment's 14% revenue growth to BRL 2.459 billion reveals the durability of Afya's regulatory moat. With over 25,000 medical students representing 6% growth and a 3.4% increase in net average ticket to BRL 9,141, Afya demonstrates both volume and pricing power. The segment's gross margin expansion reflects operational leverage as fixed costs spread across more students and tuition increases outpace inflation. The 100% occupancy rate is not a temporary phenomenon—it is structural, resulting from MEC's restrictive approval process and Brazil's physician shortage.

Continuing Education's 11% revenue growth to BRL 208 million masks a strategic transformation. The 36% decline in residency journey students to 9,969 reflects the deliberate combination of Mentoria and residency prep programs, eliminating double-counting. While this creates optics headwinds, the 26% growth in graduate journey students to 9,180 and 65% B2B revenue surge demonstrate successful pivoting to higher-value offerings. The segment's strong gross margin expansion validates the operational restructuring that centralized teams and shifted digital assets, unlocking synergies that generalist competitors cannot achieve.

Medical Practice Solutions grew 9% to BRL 128 million despite the portal transition headwinds. Paying users held steady at 195,000 while monthly active users declined, indicating successful conversion of free users to paid subscribers. The 7-point sequential gross margin improvement in Q3 2025 shows that cost management initiatives are gaining traction. This segment's 11% B2P revenue growth and stable B2B revenue at BRL 14 million suggest the digital monetization strategy is working, even if user acquisition metrics appear weak.

Consolidated results tell a story of disciplined capital allocation. Adjusted EBITDA grew 19% to BRL 1.292 billion with 46.4% margins, while net income increased 20% to BRL 593 million. The 101.5% cash conversion rate and BRL 473 million net debt reduction demonstrate exceptional capital efficiency. Despite funding the FUNIC acquisition and returning capital through dividends and buybacks, Afya's net debt/EBITDA ratio stands at just 0.8x, providing substantial firepower for the targeted 200-seat annual M&A program.

Outlook, Management Guidance, and Execution Risk

Management's 2026 guidance reveals confidence in pricing power and operational execution. The targeted 5-5.2% tuition increase for 2026, well above inflation, assumes continued demand for medical education and stable FIES penetration at 17-18%. This pricing trajectory, combined with the maturation of four Mais Medicos campuses launched in Q3 2022, should drive continued margin expansion. The FUNIC acquisition's 60 seats will mature to 50-60% contribution margins within two to three years, following the typical pattern where margins expand as implementation costs amortize and class sizes grow.

The M&A pipeline appears robust, with management expressing confidence in maintaining the 200-seat annual acquisition pace despite increased competition from newly approved institutions. The key differentiator will be Afya's ability to pay appropriate valuations for quality assets while leveraging its integrated platform to extract synergies. The October 2025 commercial notes issuance of BRL 1.5 billion, used to redeem debentures and repurchase SoftBank (SFTBY)'s preferred shares, extended gross debt duration to 3.2 years while maintaining a low cost of debt at 106% of CDI . This liability management provides financial flexibility to pursue acquisitions without diluting shareholders.

The primary execution risk lies in completing the digital platform transition while maintaining user engagement. The portal migration's impact on MAUs must reverse for the B2B monetization strategy to reach full potential. Additionally, the OECD Pillar Two tax implementation presents a material headwind. Management is challenging the tax through legal and administrative channels, arguing it reduces PROUNI program benefits, but if unsuccessful, the 15% minimum tax will increase cash taxes and reduce earnings power by approximately 5-6%.

Risks and Asymmetries: What Could Break the Thesis

The OECD Pillar Two tax represents the most immediate threat to Afya's investment case. Brazil's implementation of the 15% global minimum tax increased the nine-month effective tax rate from 5.1% to 9.7%, with management expecting convergence to 15% in 2026 if challenges fail. This 5-6 percentage point tax increase would directly reduce net income and cash flow, potentially limiting M&A capacity and shareholder returns. The company's argument that PROUNI should qualify as a credit under Pillar Two faces uncertain prospects, making tax litigation a critical variable to monitor.

Regulatory risk extends beyond taxes. While the MEC's restrictive approval process creates Afya's moat, any acceleration in seat authorizations could increase competition and pressure occupancy rates. The ENAMED exam rollout in 2025 increases quality scrutiny, favoring Afya's established institutions but also raising compliance costs. If the government responds to physician shortages by liberalizing approvals, Afya's scarcity premium would erode, compressing both pricing power and margins.

Competition in residency preparation programs remains intense, with management acknowledging a "very high competitive landscape." The 36% decline in residency journey students reflects both restructuring and market share loss to specialized prep providers. While the graduate journey's 26% growth offsets this decline, continued pressure in residency prep could limit Continuing Education segment growth and margin expansion.

The digital platform transition presents execution risk. While the strategic rationale for gathering detailed user data is sound, the 9% reduction in monthly active users creates a temporary revenue headwind. If user engagement does not recover as management expects, the B2B revenue growth trajectory could stall, reducing the segment's contribution to overall profitability and limiting cross-selling opportunities across the ecosystem.

Valuation Context: Discounted Moat or Value Trap?

At $14.65 per share, Afya trades at 9.77x trailing earnings and 6.54x EV/EBITDA, a significant discount to education sector peers that command 12-15x EBITDA multiples. This valuation gap appears misaligned with the company's regulatory monopoly, 46.4% EBITDA margins, and 101.5% cash conversion rate. The 1.58% dividend yield and active share repurchase program, including the largest buyback in company history launched in August 2025, signal management's confidence that the market undervalues the business.

The enterprise value of $1.70 billion represents 2.53x revenue, modest for a company growing revenue double-digits with expanding margins. Free cash flow of $191.91 million implies a 14.4% FCF yield, exceptionally high for an asset-light education business. This yield provides substantial capital for the 200-seat annual M&A program, which management values at approximately BRL 1.5-2.0 million per seat, suggesting potential to deploy $60-80 million annually on accretive acquisitions.

Relative to peers, Afya's specialization commands a premium that the market has not yet recognized. Yduqs' diversified model trades at lower margins despite similar growth, while Cogna's turnaround story lacks Afya's pricing power. Ânima (ANIM3)'s quality focus matches Afya's strategy but at smaller scale, and Vitru's pure digital approach cannot replicate Afya's hybrid campus advantage. The valuation discount likely reflects concerns about tax headwinds and execution risk, creating potential upside if management successfully navigates these challenges.

Conclusion: A Defensible Franchise at an Inflection Point

Afya's investment thesis centers on a regulatory monopoly that generates 100% occupancy and pricing power, combined with an integrated ecosystem that monetizes physicians throughout their careers. The company's ability to expand EBITDA margins by 200 basis points while navigating tax headwinds and digital transformation demonstrates operational excellence that generalist peers cannot match. The 101.5% cash conversion rate and conservative 0.8x net debt/EBITDA ratio provide substantial firepower for the 200-seat annual M&A program, which should drive mid-teens revenue growth for the foreseeable future.

The critical variables determining success are resolution of the OECD Pillar Two tax challenge and successful completion of the digital platform transition. If management's legal and administrative efforts preserve PROUNI benefits, the tax rate would remain near 10%, preserving an additional 5-6% of earnings power. Similarly, if the Afya portal transition resumes user growth while maintaining B2B monetization, the ecosystem's network effects will strengthen, justifying premium valuations.

Trading at 6.54x EBITDA versus peers at 12-15x, the market prices Afya as a generic education provider rather than a specialized medical monopoly. This valuation gap creates asymmetric upside for investors willing to underwrite execution risk. The company's track record of delivering on guidance, combined with its clear capital allocation strategy balancing M&A and shareholder returns, suggests a management team that understands its competitive advantages. For long-term investors, Afya represents a rare combination of regulatory protection, operational leverage, and digital optionality at a discount to intrinsic value.