Description

Laureate is a high-return, reasonably high-growth (low-teens projected local-currency EBITDA CAGR) branded consumer business operating in attractive markets for private higher education (Mexico, Peru) with a strong capital allocator at the helm.  The company has an under-levered balance sheet, is trading at low multiple of earnings and FCF (5.3x EV / 2024E EBITDA, 6.0x EV / 2024E EBITDA-CapEx, <10x Price / 2025EPS) and has a few growth opportunities that don’t appear priced in by the market.

Over the medium-term, the downside appears somewhat protected as management and the board seem likely to explore selling the assets (which have seen strategic and sponsor interest in the past) should the shares remain meaningfully undervalued.

Laureate today operates five universities across over 50 campuses in Mexico (~56% of revenue, ~42% of EBITDA) and Peru (44% of revenue, 58% of EBITDA).  The company is the largest operator of private universities in both markets. 

The shares are mispriced in my mind mainly because U.S. investors see Laureate’s name, still associate it with U.S. for-profit education, vomit a little in their mouths, and quickly move on to other ideas.  Even dedicated EM & LatAm investors likely group LAUR with the Brazilian higher education names, as they’re the only listed peers.  The Brazilian education names have not had a good run over the past ten years given a boom-bust cycle around the government providing, then pulling, an attractive student loan program (FIES program) and implementing regulatory changes that led to excess capacity and pricing pressure from the rise of new “distance learning” competitors.

But Laureate’s markets for private education are structurally different from Brazil and are attractive.  There is a favorable regulatory backdrop, nearly 100% of LAUR’s revenue comes from private pay (vs. government support), supply & demand for higher education is balanced, pricing grows more-or-less in-line with inflation, student outcomes are good, penetration is still low and the market is growing.  Across both markets, student enrollments were up 3% in 2023.  Though one ppt of this market growth was driven by LAUR enrollments growing 6% (i.e. twice the market and 3x the rest of the market excluding LAUR).

At the beginning of 2023, LAUR management put out medium-term targets: 8-10% 3-year compounded FX-neutral revenue growth, a low-teens FX-neutral EBITDA CAGR, CapEx/Reveue <5%, a neutral change in working capital and >30% EBITDA Margins and an effective tax rate <40% in the medium-term (3-5 years).  These are pretty attractive financial metrics that to me clearly deserve something higher than a 6x EV / EBITDA-CapEx multiple, the higher cost of capital markets of Peru and Mexico notwithstanding.

However, management provided initial 2024 guidance below these medium-term targets, driven by the economic situation in Peru.  Peru is currently coming out of its first recession ex-COVID since 2001 driven by adverse weather (commodity revenue is 15-20% of GDP in Peru) and political turmoil.  As a result, management guided 2024 organic revenue growth to only 4-5%, with organic EBITDA increasing “only” 6-9%.  However, economic indicators in Peru are already improving and management is suggesting they’ll be exiting the year closer to the higher end of those growth rates (with secondary intake in September in Peru to reflect more normalized economic environment).

Beyond 2024, there could be a bit of a nearshoring tailwind to earnings that isn’t yet factored into sell-side estimates.

Brief History & Capital Allocation

A big part of the Laureate investment thesis for me is the CEO Eilif Serck-Hanssen, who I believe truly understands capital allocation.  Eilif became CEO in 2018 after being CFO of Laureate since 2008 and having previously worked at Xojet, PepsiCo, Northwest Airlines, and US Airways.  Eilif has 95% of his net worth invested in LAUR.

LAUR was previously written up as a special situation on VIC back in 2021 as a partial liquidation play ahead of the completion of the divestiture of LAUR’s U.S. online healthcare university, Walden.  That pitch along with a 2019 pitch are helpful background of LAUR’s public history.  But the takeaway from a capital allocation perspective is that since Eilif was named CEO, Laurate went through a tremendous transformation initiative, divesting the vast majority of its assets (tax efficiently) and using the proceeds and FCF of the remaining business to buy back stock and pay out special dividends.  All in, since Eilif was named CEO Laurate has paid out ~65% of the then share price in special dividends and reduced the share count by 31%.  Truly “Outsider” type numbers.

When Eilif was appointed CEO on January 1, 2018 Laureate was operating 70 institutions in 25 countries, with 1.1 million students, $4.4bn of revenue, $832 million in EBITDA (19% EBITDA Margins), was levered 4x Net Debt/EBITDA and was generating negative FCF.  Today, the company has ~450k students, $1.5 billion of revenues, $420 million in EBITDA, 28% EBITDA Margins and almost no debt (0.2x Net Debt/EBITDA).  The business is tremendously simplified with the company operating in only two countries and with only five institutions.

Legacy Laurate was the product of a 2007 MBO with a KKR/SAC-led consortium.  Under the prior management team, Laureate made over 40 acquisitions ($2 billion of acquisition value), taking the company from $1.5bn to $4.4bn in revenue. They attempted to replicate the concept of Laureate throughout the world.  But they did it in a capital-constrained way, ended up levering up the company to close to 7x as currencies moved against them.   They couldn’t do it the scale they wanted to, and so they ended up doing a lot of “flag planting” but not a lot of integrating or efficiently running the universities.  Eilif was named CEO in 2018 to execute on the transformation plan which led to the January 2020 announcement of a strategic review for all markets.

Even before the divestiture of Walden and the late 2021 special dividend of the Walden proceeds ($7/share), management has done a great job managing the business.  Capital intensity in Laureate has been reduced from ~9.5% from 2016-2018 to ~5% today.  And organic revenue growth accelerated from ~5% to ~10% in 2023.  And yet the shares have only re-rated from 4.5x EV/EBITDA when it was a partial liquidation play written up in 2021 to 5.3x today. Admittedly, interest rates have gone up during that period. But the re-rating in my opinion still has a ways to go. 

Management has focused a lot more on investor relations over the past twelve months, following KKR’s full exit in late 2022 and further selling from the LBO consortium members in late 2023 (which may have weighed on the share price), but it still only has three sell-side analysts covering the stock as it doesn’t properly fit into any sector buckets.  Legacy LAUR used to have nine analysts covering it.

What excites me about Eilif being at the helm today is that his capital allocation priorities will depend on where the share price is:

• If shares remain low, free cash flow will continue to be plowed into buying back stock (a $100m buyback program is currently authorized).  CapEx/Revenue of 5% can get them to continue to chug along at 8-10% FX-neutral revenue growth (for “years”)

• However, if the shares re-rate and trade at a higher multiple, management thinks they could easily “step on the gas” and pursue more growth opportunities. 

  • Considering management projects achieving 35% IRRs (post-tax) on campus expansions, there could be a scenario where the market gets quite excited by the higher growth

Growth Opportunities / Nearshoring

In a base case, management seems focused on selectively starting to invest in expansion in Mexico from 2025 (mainly at the value brand).  This could lead to a slight increase in consolidated CapEx to ~5-6% in the medium-term.  Obviously nearshoring is a hot topic in Mexico at the moment (Manpower Group estimates Mexico could generate up to 2 million additional jobs driven by nearshoring) and there is substantial demand for upskilling the labor force.  Laureate management are receiving inbound demands from factories, saying they have no qualified people, asking LAUR to “come and train them”.  As a result, Laurate has 400-500 clients (international and local companies) doing pilots with 250 distinct near-shoring programs.

Laureate are planning on experimenting this year and deciding how or whether they want to pursue this opportunity.  Management seem a little on the cautious side considering they’re a B2C company and this would be a B2B offering.  It seems like the potential competition here is from the Courseras of the world an otherwise smaller/local players.  Laurate would seem to have a real advantage given its branding and its current operations (e.g. 40% of Master’s degrees are already in the area of supply chains).  Management are thinking about using the UVM (discount) brand for the nearshoring initiative.

I don’t have a great handle yet on the unit economics for potential B2B nearshoring but it shouldn’t take huge student numbers at high flow-through (minimal incremental expenses/infrastructure) to start to add to the EBITDA growth of the business.

Balance Sheet

The balance sheet is currently under-levered at 0.2x Net Debt/EBITDA and management has acknowledged there hasn’t been a final decision on the proper capital structure for this company.  In the past management has borrowed on their revolver to buy back stock.  I view the flexibility here as an attractive option.

Brief Business Background

Laureate is the largest private market player in both Mexico and Peru, leading both face-to-face and online teaching modalities. The company has a market share of 11% of the private market in Mexico and 17% of the private market in Peru (based on enrollments): more than twice the second player in each market.

Laurate operates five universities, branded UVM (premium) and Unitec (value/teaching) in Mexico and UPC (premium), UPN and Cibertec (technical/vocational) in Peru.  Revenues are generated from private-pay sources without material government-sponsored student loan programs in Mexico or Peru.  Funding is driven by family savings, student salaries and ongoing family cash flow.

Over 450k students are enrolled across Laureates’ 50+ campuses. Majority of academic programs last between four and five years (more than 75% of students in programs four years or more).  Annual retention rates have averaged ~80% over the past five years. LAUR programs are focused on applied, professional-oriented content for growing career fields and on academic disciplines that offer strong employment opportunities and high earnings potential for its students, particularly in science, technology, engineering and business (account for >80% of total post-secondary enrollments). There are also “hidden assets” of medical schools, dental schools and vet schools inside their portfolio.

In Mexico, private institutions have 43% of higher education market share.  In Peru, this number is 74%.  Penetration rates are still low with the higher education gross participation rate only 34% Mexico and 52% in Peru (versus 60% and 56% in the U.S. and the EU, respectively).  Almost 100% of incremental seats are coming from private education in both markets.

The company benefits from strong brand awareness and the highest accreditations available:

•  In Peru Laureate has the #1 rated brand in entire country for education, and the #9 rated brand for all consumer brands. In Mexico, UBN is a top 10 brand

• All universities in Mexico and Peru are 5-star rated from QS Stars, an independent university ranking and rating organization

Student Outcomes are strong, with the average wage premium for those with a tertiary education over 50% in Mexico.  Average revenue per student four Laureate is roughly ~$3,400/year. Higher for Laureate premium brands (UVM in Mexico and UPC in Peru) with value brands are offered at a ~50% discount to the premium brands. The company’s guidance implies average revenue per student growing at a 3% CAGR in constant currency. 

Building blocks to 8-10% FX-neutral revenue growth:

• 5-7% enrollments growth. ~3pts driven by demographics and penetration and 3-4pts through market share gains

  • Program expansion, campus expansion, online expansion

• Pricing/inflation (net of mix)

It’s also worth highlighting that there is a meaningful margin gap between Mexico and Peru despite Mexico having more scale.  Laureate generated 2023 EBITDA Margins of ~22.6% in Mexico and ~40.9% in Peru.  A decent chunk of this difference is due to Laureate owning the real estate in Peru (LAUR has ~$0.5 billion of owned real estate overall) with lease expense ~12% of revenue in Mexico and ~1% in Peru.  Campuses are more dispersed in Mexico, while Peru has fewer, more concentrated campuses (14 of 19 are in Lima).   Also, during the pandemic more discounts and scholarships were required in Mexico relative to Peru and as those students graduate, there should be some natural margin expansion.  Mexico displayed impressive margin expansion in 2023 (+250bps), driven by strong operating leverage (incremental margins are >50%) given capacity on campuses in Mexico from the shift towards hybrid learning.  The company is also optimizing its real estate and pursuing cost and operational efficiencies (centralizing the back office, optimizing classroom sizes and teaching hours, creation of a national academic office).  Management are saying incremental restructuring in Mexico in 2024 will contribute another +50bps to margin expansion, starting to flow through this year.

Hybrid learning has been a benefit to Laurate’s profitability and return on capital.  Today Laureate has 76k of enrollments fully online (over 65k fully online students in Mexico whereas online education is more nascent in Peru). Online penetration in these markets are still well below the U.S. (23% in the US vs. <5% in Peru, 11% in Mexico).  Laurate is focused on campus/hybrid model for traditional 18-24 year-olds and fully online model for working adults and postgraduates.  Pricing is cheaper for digital learning but margins are similar as OpEx is significantly lower. For Laurate, the mix of digital teaching hours was 27% pre-COVID and management sees this stabilizing post pandemic at 40-60%.

The shift towards a more hybrid environment is evident in the company’s margin profile and capital intensity.  Historically CapEx was ~5% of revenues and led to 5-7% revenue growth. Mgmt had been pointing to revenue growth accelerating to 8-10% with a focus on capital-efficient growth levers leading to CapEx to account for <5% of revenues.  Management have noted that $200m of real estate can be released by a 20ppt increase in digital delivery.

M&A Optionality

When running a sale process for all of the assets, the board received offers in December 2020 for Mexico and Peru.  However, this indicative interest was at valuations lower than before the pandemic which drove the decision to hold onto these markets given their attractive fundamental attributes. Management has been open saying that if in 2-3 years the stock is still trading around these multiples, they will explore a sale. The idea being that interest rates may come down and there may be political stability in these markets which would lead to more attractive multiples. For both the Mexico and Peru assets there was interest from both PE and strategics during the sale process.  The problem is that in the case of selling Peru and Mexico individually (instead of the entire company), there would be a meaningful amount of tax leakage.  Likely ~30% on the proceeds given low basis.

Laureate’s other network universities nearly all sold for between 9-15x EV/EBITDA and Mexico and Peru are better assets than the average.  Brazil and US sold for 9-9.5x, Australia (similar growth to Peru/Mexico) 15x, Spain (growing mid-single-digits) 12x.  Most of these multiples were in a different interest rate environment so are likely less relevant, though I wouldn’t be surprised if management and the board have an 8-10x EV/EBITDA multiple range in their mind as “fair value” for these businesses.

I should add that Point72/Cohen Private Ventures are still ~10% shareholders here (part of the initial LBO) and Andrew B. Cohen is vice chairman of the board, which I imagine will be helpful in ultimately unlocking value.

Tax Rate

It’s worth calling out that the effective tax-rate for Laureate has been obscenely high the past few years (e.g. 54% in 2023), limiting free cash flow conversion and likely weighing on the multiple.  This has been partially driven by an unwinding of legacy Laureate infrastructure.  Management is guiding to a <40% normalized tax rate starting in 2025 driven by 30% corporate tax rates in Peru and Mexico, ~5% dividend cash back from operations, and a ~5% negative drag on the effective tax rate as US-based corporate expenses are not tax-deductible as the company has no earnings in the U.S.

Macro

Obviously part of the reason for the ostensibly cheap absolute valuation is the higher cost of capital geographies where Laureate operates.

The 10-year Mexican sovereign is yielding 10.0%, Peru’s 10-year is yielding 7.3% vs. 4.62% for the U.S. 10-year.  The Mexican equivalent of the 10-year TIPS is yielding 5.4% vs. 2.25% for the U.S.  I don’t see a similar instrument quoted for Peru but Mexico’s central bank targets a 3% inflation rate and Peru’s targets a 1-3% rate.

Typically, I’d recommend investors bake in some currency depreciation into USD return expectations when investing in markets like these.  However, I’d note that both the Mexican Peso and Peruvian Sol both appreciated versus the USD in 2022 and 2023, in the face of significant rate hikes by Jerome Powell.  This in itself is an intriguing datapoint which perhaps augurs well for emerging markets more broadly: the idea being that more orthodoxy fiscal and monetary policies in EMs (vs. developed market economies/govts) combined with foreign direct investment fleeing China and finding other geographies and strengthening EMs’ external accounts in the process, means a bit of a new normal for EMs.  Certainly “nearshoring” (Mexico) and “copper” (Peru) are themes very much in favor by investors at the moment.

Key Risks:

• A Trump Presidency leading to higher tariffs on Mexican exports

• New Mexican government surprising negatively (general elections June 2024)

• Regulatory changes (capricious LatAm governments)

Catalyst

• Buybacks
• Continued growth