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Thursday, February 06, 2014

Education
AEDU3 Rating Price (02/05/2014) YE14 Target Price Total Return Potential KROT3 Rating Price (02/05/2014) YE14 Target Price Total Return Potential ESTC3 Rating Price (02/05/2014) YE14 Target Price Total Return Potential P/E AEDU3 KROT3 ESTC3 EV/EBITDA AEDU3 KROT3 ESTC3 14E 19.1 17.4 17.0 14E 12.2 14.1 12.3 15E 14.6 14.5 13.9 15E 10.3 11.7 10.0 Outperform R$13.1 R$18.2 40%

Debating FIES with FNDE

BOTTOM LINE: We held this week a meeting in Braslia with Flvio Carlos Pereira, FNDEs General Coordinator of Operational Support of FIES, and Adriano Fonseca Seabra, FNDEs General Coordinator of Concession and Financial Control of FIES. Overall, our take was that FIES should remain as it is, at least in the short term, with no measures from the government to limit its growth or increase institutions stake in future delinquency risk. Our impression is that the government is satisfied with the program results, based on growth of enrollments and profile of students financed. No issues/irregularities (e.g. tuition price, concentration) have been identified so far. Timing for extension of FIES to distance learning, however, remains uncertain. No growth limitation on the radar. Last numbers related to 2013 show that FIES program is still ramping up, having reached 556K new contracts, or +47%, totaling 1.16 million contracts in four years (76K in 2010, 154K in 2011 and 377K in 2012). Even though such figure is above the initial 400K MEC estimate, we learned that there is no size target for the program and that there should not be any growth limitation in the program this year. Mr. Pereira noted that the government has a goal to increase the penetration of higher education and highlighted that 78% of the financed students have a monthly income of 1.5 minimum wage per capita and 75% studied in public schools, thus addressing the need from lower-income population. From the government budgetary standpoint, Mr. Pereira mentioned that no constraint for FIES has been signaled at this point and clarified that FIES does not impact governments primary surplus (now that all new contracts are constituted of FGEDUC following the recent change announced last month). Tuition prices and concentration are not causes for concern. Mr. Pereira mentioned that tuition prices considering only the FIES contracts have declined in absolute terms over the past four years (-10.3% vs. +19.4% of inflation in the period), which was a pleasant surprise for MEC (we believe this is due to a mix effect, i.e. courses and institutions). He stated that the government closely monitors the prices (per course and institution) and has not detected any abuse so far (Uniesp issue was different, related to operational problems). Regarding concentration of FIES contracts (we calculate AEDU, KROT and ESTC have ~23% share in FIES vs. ~15% in number of students), he sees no issue at this moment. FIES has been fueling sector growth, which tends to naturally favor market concentration. Delinquency is not expected to surpass 5%. The government is positive about a low delinquency in the program, seeing no reason to increase the contribution of institutions in FGEDUC, for instance. Mr. Pereira explained that the 5.63% contribution was defined based on actuarial calculations, considering the terms of financing. He also mentioned that delinquency in banks credit portfolio for individuals reaches ~3%. At this point, there is no data to dispute/confirm the estimates given that amortization is expected to start more significantly in 2017.

Outperform R$37.7 R$40.1 8%

Neutral R$19.4 R$20.6 7% 16E 12.3 12.2 12.2 16E 9.1 9.8 8.5

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Marcio Osako, CFA

Ricardo Ara, CNPI

No news on eligibility for distance learning. We could not get a clue regarding the reason behind the delay of FIES to distance learning. According to Mr. Pereira, the decision is pending definition from a group at MEC that has been evaluating the issue since last year. It was not clear for us whether such delay relates to quality issues (given that ENADE tests demonstrate scores in distance learning are equivalent or slightly better than on-campus) or to current level of concentration in the sector.

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