Afya's Strategic Acquisitions and Margin Expansion Fuel Sustainable Growth

Afya Limited (NASDAQ:AFYA) has emerged as a standout performer in the education sector, with its first-quarter 2025 results underscoring a compelling combination of strategic acquisitions, margin expansion, and financial discipline. These factors are not only driving earnings growth but also positioning the company for sustained valuation upside. With a 16.4% year-over-year revenue increase and a 23.7% surge in Adjusted EBITDA, Afya is proving that its focus on medical education and operational efficiency can deliver outsized returns for investors.

The Power of Strategic Acquisitions: Building Scale and Efficiency

Afya's recent acquisitions have been masterclasses in value creation. The May 2025 purchase of Funic, a medical school in Belo Horizonte, added 60 seats and represents a strategic bet on Brazil's growing demand for healthcare professionals. The deal's structure—R$60 million upfront, with contingent consideration tied to future seat approvals—ensures Afya pays only for proven growth. Meanwhile, the Unidom acquisition in Salvador, completed in July 2024, illustrates how operational expertise can turn underperforming assets into profit engines. Within two intake cycles, Unidom's campus achieved 100% occupancy, directly contributing to margin expansion.

These moves align with Afya's broader ecosystem strategy: acquiring underutilized campuses, integrating them into its centralized operations, and leveraging economies of scale. The result? A 12.2% year-over-year increase in approved medical seats to 3,593, with total seats now at 3,653 post-Funic. This growth isn't just about numbers—it's about securing a monopoly on talent pipelines in a sector where demand outstrips supply.

Margin Expansion: The Engine of Profitability

Afya's 52.5% Adjusted EBITDA margin in Q1 2025—a 300 basis point improvement from the prior year—is a testament to its operational excellence. Gross margin gains in undergraduate and continuing education segments, combined with cost-cutting in Medical Practice Solutions, have created a leaner, more profitable business. Notably, SG&A expenses fell as Afya centralized shared services like IT and marketing, reducing redundancies.

The company's focus on high-margin medical education is paying dividends. While continuing education segments face headwinds (e.g., declining residency enrollments), Afya's core undergraduate programs—up 14.5% in student count—drive profitability. This balance ensures Afya isn't overly reliant on volatile markets, making its growth more durable.

Financial Fortitude and ESG Credibility

Afya's strong cash position—R$1.15 billion as of Q1—provides ample flexibility for M&A and shareholder returns. The company's first-ever dividend, R$1.35 per share paid in April, signals confidence in its cash flow stability. Moody's recent upgrade to AAA.br (Brazil's top credit rating) further solidifies its financial credibility, while a 15-basis-point interest rate reduction on IFC loans lowers financing costs.

ESG leadership is another differentiator. Afya's BBB MSCI ESG rating reflects its focus on data privacy and renewable energy initiatives, aligning with global ESG trends. This could unlock cheaper capital and regulatory favor in the long term.

Risks on the Horizon, but Manageable

Afya isn't without challenges. Brazil's new 15% minimum tax under OECD Pillar Two added R$23.2 million in Q1 expenses, and the company has sued to overturn it. While litigation outcomes are uncertain, Afya's cash reserves and margin strength provide a buffer. Seasonality in continuing education also creates quarterly volatility, though undergraduate programs remain steady.

Why Afya Deserves a Place in Your Portfolio

The math is compelling: Afya's 2025 guidance calls for R$3.67–3.77 billion in revenue and R$1.62–1.72 billion in Adjusted EBITDA, implying further margin expansion. With a 20% dividend payout ratio and a pipeline of acquisition targets, total returns could accelerate.

Investors should note that Afya trades at a 10x EV/EBITDA multiple versus peers at 12–15x, suggesting undervaluation. While the stock's near-term performance may hinge on tax litigation outcomes, the long-term thesis—dominating Brazil's medical education boom—is rock-solid.

Investment Takeaway: Afya presents a rare blend of growth, profitability, and shareholder-friendly policies. Investors seeking exposure to a secular trend (rising healthcare demand) and a management team with a proven M&A playbook should consider buying the dip. The dividend adds a yield component, while margin upside and seat expansion promise capital gains. Afya isn't just surviving—it's setting the pace for the future of medical education.