Morgan Stanley says this sector in Brazil is ‘inexpensive’

Morgan Stanley believes in the upside potential of all stocks in the Brazilian education sector, with valuation considered cheap. In a report released to clients and the market, analysts from the bank point out advantages in all names, after the stocks have been devalued. "We believe the sector is entering a sustainable organic growth path," says the report.

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The decline in shares this year would have occurred due to "reality checks after 4Q23 results and (ii) the rise in the yield curve, which particularly impacts cyclical and leveraged sectors like education."

However, the bank is not very optimistic about first-quarter earnings, given tougher comparisons amid the sector's recovery last year. Thus, profit growth prospects are limited, which could make reclassifications in stocks difficult.

Morgan lowered profit projections by incorporating higher rates and revised the target price of the stocks. "Our 2024 outlook is that it may be difficult for education names to beat expectations again. However, following the de-rating, expectations seem now realigned with the sector's run rate," analysts added.

Analysts expect the first quarter to yield more favorable results for Ser Educa ON (BVMF:SEER3), Anima Holding SA (BVMF:ANIM3), and Cruzeiro do Sul Educacional SA (BVMF:CSED3). Meanwhile, Vitru Ltd (NASDAQ:VTRU), Cogna Educacao SA (BVMF:COGN3), and YDUQS Participacoes SA (BVMF:YDUQ3) are likely to have a quarter with mixed data, including revenue growth but tighter margins.

Recommendations and target price

Vitru and Anima stocks are considered overweight, or above average, equivalent to a buy, while Yduqs, Cruzeiro do Sul, Vasta, Cogna, and Afya (NASDAQ:AFYA) are equal weight, which corresponds to neutral, and Ser Educacional underweight, or below average, equivalent to a sell.

For Cogna, the target price has been revised from R$3.10 to R$2.70, while for Yduqs, it's from R$24 to R$20.50. Ânima also had a price adjustment from R$6.50 to R$6, Vitru from US$21.50 to US$20, and Afya from US$22.50 to US$21.

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