CFA Investment Research Challenge

Anhanguera Educacional S.A.

December 3rd, 2011

Team: Insper

Type: Partial Presentation1

Note:

1. This is only a preview. This presentation wiil suffer changes until the presentation day (12/06/2011)

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Introduction

Anhanguera’s stock history1 and target price

Based on a DCF model, we rate Anhanguera with a buy recommendation

Source: Bloomberg / INSPER student’s estimates

Upside 72%

Target Price: R$ 31

BUY Rating

Note:

1. Data until 12/02/2011

SECTION 1

SECTION 2

SECTION 3

SECTION 4

SECTION 5

Education Sector’s Drivers

Anhanguera’s Business’ Drivers

Financial Analysis

Valuation

Risks

Contents

4

7

12

16

20

Disclaimers 24

SECTION 1

Education Sector’s Drivers

82%

75%

67%

59%

52%

27% 23%

20%

1 2 3 4 5 6 7 8

1.1 Penetration Rate on Post Secondary Education

Education in Brazil is a promissing sector, with large future growth possibilities

Brazilian education sector offers a huge growth opportunity

Source: SEMESP

Post Secondary Penetration Rate (%)1 Penetration of Post Secondary Education in Brazil (%)1

1. Education Sector’s Drivers

77%

35%

9%

3%

A B C D/E

There’s a large

educational gap in

Brazil to be

fulfilled...

Avg. 51%

Underpenetration

mainly due to

middle and low

class

...and we believe

FIES and Brazil’s

GDP growth are

crucial factors to

diminish it

Note:

1. Data from 2008

Source: Hoper Consultoria

1.2 GDP Growth and FIES

The two main drivers to develop the educational sector

Sectors Elasticities

For those reasons, education sector shows great potential for growth

Brazil’s GDP Growth

FIES Effects

1.6x

1.3x

1.3x

1.1x

1.1x

1x

0.7x

Education

Transportation

Healthcare

Culture &…

Personal Expenses

Housing

Food

1 Enrollments growth

2 Dropouts decrease

3 Delinquency minimized

4.2%

3.7% 3.8%

07 - 10 11 - 15e 16 - 20e

Having a high

elasticity, the

Brazilian

educational sector

will benefit from the

robust future

economic growth...

...while FIES will

also help to boost

enrollments,

reducing dropouts

and delinquency

Source: Company’s Data

FIES Eligibility

Course materials aproved

by regulators

Quality test scores

above 60%

Family income below 2

minimum wages

Pay a fraction of the course

while enrolled

Entertaiment

1. Education Sector’s Drivers

Source: SEMESP Source: Bacen / LCA Consultores

SECTION 2

Anhanguera’s Business’ Drivers

2.1 Anhanguera’s Business Drivers Overview

Anhanguera’s three competitive advantage pillars

2007 – 2010 Comparative Enrollment (‘000) Anhanguera’s Competitive Advantages

Price and Quality

Lower comparative tuition price

Greater comparative quality

Distance Learning Centers

Broader target audience

Greater economies of scale

Acquisition and Integration Teams

Great acquisition track record

5 - year margin integration with AEDU’s standards

1

2

3

2. Anhanguera Business Drivers

57

175

18

358

248

94

1 2 3

CAGR

130% CAGR

12%

CAGR

73%

07’ 10’ 07’ 10’ 07’ 10’

Source: Companies’ Data

...mainly due to

three competitive

advantages: lower

price and high

quality, DLC’s

participation and

acquisitions

Anhanguera is able

to deliver a higher

enrollment growth

compared to its

peers...

Anhanguera stands out among its peers, making it the sector’s top choice

Economies of scale

Partnerships with quality suppliers

Standardized course structure

Teachers’ salary based on ENADE results

288

386

536

1 2 3

2.2 Price and Quality

Anhanguera has the best quality and the greatest affordability compared to its peers

Average Tuition Price (BRL) National Student Performance (ENADE)

2.86

2.69 2.67

1 2 3

2. Anhanguera Business Drivers

2.65

2.7

2.75

2.8

2.85

2.9

0 150 300 450 600

ENADE scores

Tuition

Despite having the

lowest tuition,

Anhanguera offers a

better service when

compared to its

peers...

Comparative Quality and Price Price and Quality

...This results in the

competitive

advantage of having

the best quality to

cost ratio

Source: Companies’ Data Source: Companies’ Data

2.90

2.85

2.80

2.75

2.70

2.65

Greater Performance

Lowe P

rice

Anhanguera is able to offer the best of both worlds to its customers

Campus

Distance

Learning

Center

42%

16%

4%

1 2 3

2.3 Distance Learning Centers

Distance Learning Center is one of Anhanguera’s engine

Great convenience delivering high margins

Percentage of Total Students on DLCs Target Audience

42-48

36-42

30-36

24-30

18-24

12-18

12 and under

48+

Distance Learning Centers Characteristics

Wider target audience

Higher margins

Located in cities with less than 100,000 inhabitants

Hybrid program (students attend centers once a week)

Distance Learning

Centers have a

wider target

audience because

of its greater

convenience...

...And have a higher

gross margin (55%),

due to its great cost

dillution

2. Anhanguera Business Drivers

41%

55%

2010 Campus 2010 Distance Learning

Comparative 2010 Gross Margin

Source: Companies’ Data

227

66 57

1 2 3

2.4 Acquisitions

M&A Team deliver great execution with fast integration of acquired units

Number of Students Acquired (‘000)

Acquisition and Integration teams are valuable assets to the company

Acquisition EBITDA Margin Evolution

Anhanguera’s Expected Acquisition Targets1

Acquisitions track

record explicits the

efficiency of the

execution team...

... And the margins

evolution shows an

able integration

team

Source: Companies’ Data

0

10%

17%

23%

27% 30%

Year 0 Year 1 Year 2 Year 3 Year 4 Year 5Source: Insper Student’s Estimates

Note:

1. Ilustrative view. Targets not precisely positioned.

Source: Insper Student’s Estimates

SECTION 3

Financial Analysis

3.1 Revenue Model

Those 4 channels deliver our expected revenue rise

Anhanguera’s 4 enrollment growth channels

Net Revenue (BRL Million) Anhanguera’s Enrollment and Capacity Channels

1

2

3

4

112

1,558

3,468

4,236

2006 2011E 2016E 2021E

CAGR

69%

CAGR

17%

CAGR

4%

3. Financial Analysis

Source: Company’s Data

Acquisitions

Great acquisition track record

Greenfields

• Projection of 7 new campuses in the next years

Campus’ Organic Growth

FIES and GDP growth support this channel

Distance Learning Centers’ Organic Growth

Broader target audience

Revenue growth

sustained by

enrollment

increase...

...Since we forecast

Anhanguera’s

tuition using just

the inflation rate

4 channels sustaning a high growth on Ananguera’s student base

Acquisitions (‘000)

Anhanguera is expected reach its 2016 guidance of 750k students

Campuses’ Enrollments (‘000)

Number of Campuses

Distance Learning Centers’ Enrollments (‘000)

235.5

180

0

06' - 10' 11' - 15' 16' -22'

22

58 60 65

07' 11' 16' 22'

3. Financial Analysis

4

145

250 280

2007 2011 2016 2022

53

265

500 528

2007 2011 2016 2022

Source: Company’s Data / Insper student’s estimates

3.2 Enrollment Growth Channels

Anhanguera’s

historycal growth

has been

outstanding...

... and we expect a a

smaller, but still

worthy growth to

the future

CAGR

49%

CAGR

17%

CAGR

2%

CAGR

145%

CAGR

14%

CAGR

3%

CAGR

27%

CAGR

1%

CAGR

1%

188 235

328

381

501

584

705

818

2009 2010 2011E 2012E 2013E 2014E 2015E 2016E16%

18%

20%

22%

24%

26%

28%

2009 2011E 2013E 2015E

3.3 Projected EBITDA and EBITDA Margin

Margin growth will sustain our expected EBITDA growth

Increases in margins sustain expected EBITDA growth

EBITDA Margin Evolution EBITDA (BRL Million)

Low margin

acquired units

- M&A Integration

- Campuses Maturation

3. Financial Analysis

Source: Company’s Data / Insper student’s estimates

Initial decrease in

EBITDA margin, due

to inefficient

acquired units...

... Next, acquisitions

integration and

campuses

maturation sustain a

4 percentage points

expansion

Forecast

SECTION 4

Valuation

4.1 How to Finance Growth?

Three main variables financing Anhanguera’s expansion

CAPEX (BRL Million)

Net Debt / EBITDA

Cash and Cash Equivalents (BRL Million)

-1.6x

-1.2x

-0.4x -0.2x

-0.4x

0.0x

0.2x

2010

4. Valuation

959

864

577 566

631

403

205

2010 2011E 2012E 2013E 2014E 2015E 2016E

2010 2011E 2012E 2013E 2014E 2015E 2016E

Acquisitions Maintanence and Expansion

Source: Company’s Data / Insper student’s estimates

2010 2011E 2012E 2013E 2014E 2015E

2016E

139

425

550

285 346

268 305

Forecast F

F

Acquisition CAPEX

are high on the first

following years due

to acquisition...

...and are mainly

financed with cash

4.2 Weighted Average Cost of Capital

Cost of

Equity

Risk Free Rate1

(US$)

3.5%

Country Risk

Premium2 (US$)

2.0%

Market Risk

Premium3 (US$)

5.0%

Beta4

1.20

Cost of

Debt

Cost of Debt

Before Taxes5

(BRL)

12.5%

Cost of Equity

(BRL)

14.7%

WACC (BRL

Nominal)

14.0%

80%

20% Tax Rate 8%

Cost of Debt

After Taxes

(BRL)

11.5%

4. Valuation

WACC’s Breakdown

Notes:

1. Based on the American 10 year T-bond – Source: Bloomberg

2. Based on the JPM EMBI+ Brazil – Source: JPM Hub

3. Based on the historical difference between the S&P returns and the American 10 year T-bond – Source: Bloomberg

4. Based on the average beta of comparable companies – Source: Bloomberg / Insper Student’s Estimates

5. Based on the weighted average of Anhanguera’s nominal rate debt – Source: Company Data / Insper Student’s Estimates

4.3 Results From DCF Valuation

Considering a 14% WACC and a 5.5% nominal perpetuity growth

Free Cash Flow to Firm (R$ Million)

Value of Discounted Cash Flow Target Price Sensibility (BRL)

Perpetuity Growth (%) - R$ Nominal

WA

CC

(%

) -

R$

No

min

al

4.50% 5.00% 5.50% 6.00% 6.50%

13.0% 34.7 35.5 37.1 38.9 41.0

13.5% 31.5 32.7 34.0 35.6 37.7

14.0% 29.2 30.2 31.4 32.7 34.1

14.5% 27.1 28.0 29.0 30.1 31.4

15.0% 25.3 26.1 26.9 27.9 28.9

4. Valuation

Present Value of Free Cash Flow (BRL Million) 1,811

Present Value of Terminal Value (BRL Million) 2,799

EV (BRL Million) $4,611

(-) Net Debt (BRL Million) 44

Equity Value (BRL Million) 4,566

# Shares (Millions) 146

2012 Target Price (BRL) 31

Current Stock Price (BRL) 18

Upside 72%

Source: Company’s Data / Insper student’s estimates

Discounted cash flow results in a 2012 BRL 31 target price for Anhanguera.

FCFF (BRLmn) 2009 2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E

EBITDA 188.4 235.5 328.5 381.1 501.8 584.8 705.8 818.5 921.3 992.9 1,067.2 1,181.1 1,262.8 1,311.5

(-) D&A -27.8 -34.6 -67.5 -83.6 -83.7 -95.2 -91.6 -86.5 -94.2 -99.6 -105.0 -110.6 -116.4 -122.2

EBIT 160.6 200.9 261.0 297.4 418.0 489.6 614.3 732.0 827.1 893.3 962.1 1,070.5 1,146.5 1,189.3

(-) Tax -12.8 -16.1 -20.9 -23.8 -33.4 -39.2 -49.1 -58.6 -66.2 -71.5 -77.0 -85.6 -91.7 -135.1

NOPAT 147.8 184.8 240.1 273.6 384.6 450.4 565.1 673.5 760.9 821.9 885.2 984.9 1,045.8 1054.2

(+) D&A 27.8 34.6 67.5 83.6 83.7 95.2 91.6 86.5 94.2 99.6 105.0 110.6 116.4 122.2

(-) CHG in NWC -78.2 -49.3 -90.6 -59.2 -91.4 -80.8 -101.9 -94.5 -37.7 -39.2 -40.0 -51.8 -42.4 -92.0

(-) CAPEX -108.8 -139.7 -425.8 -550.8 -285.3 -346.7 -305.6 -268.1 -247.0 -188.5 -196.1 -204.1 -211.8 -122.2

FCFF -11.4 30.4 -208.8 -252.7 91.6 118.2 249.2 397.3 570.4 693.8 754.1 839.6 916.9 962.2

SECTION 5

Risks

4.1 Risks Oveview

Risks and affected variables

From the six risks presented above, we highlight: receivables, FIES and acquisition

Receivables

Macro

FIES

Tax Incentives

Acquisitions

Management

Anhanguera’s Main Risks

Receivables

Cash position weakened

M&A capability diminished

FIES

Decrease in enrollment growth

Increase in dropouts

Acquisition

Guidance not achieved

Rise in Capex

1

2

3

Risks

Source: Insper student’s estimates

5. Risks

Disclaimers

Ownership and material conflicts of interest:

The authors, or a member of their household, of this report do not hold a financial interest in the securities of this company.

The authors, or a member of their household, of this report are not aware of the existence of any conflicts of interest that might bias

the content or publication of this report.

Receipt of compensation:

Compensation of the authors of this report is not based on investment banking revenue.

Position as an officer or director:

The authors, or a member of their household, do not serve as an officer, director or advisory board member of Anhanguera.

Market making:

The authors do not act as a market maker in shares of Anhanguera.

Rating guide:

Banks rate companies as either a BUY, HOLD or SELL. A BUY rating is given when the security is expected to deliver absolute

returns of 15% or more over the next twelve-month period, and recommends that investors take a position above the stock’s

weighting in the IBOVESPA or any other relevant index. A SELL rating is given when the security is expected to deliver negative

returns over the next twelve months, while a HOLD rating implies flat returns over the next twelve months.

Disclaimer:

The information set forth herein has been obtained or derived from sources generally available to the public and believed by the

authors to be reliable, but the authors do not make any representation or warranty, express or implied, as to its accuracy or

completeness. The information is not intended to be used as the basis of any investment decisions by any person or entity. This

information does not constitute investment advice, nor is it an offer or a solicitation of an offer to buy or sell any security. This report

should not be considered to be a recommendation by any individual affiliated with CFA Society of Brazil, CFA Institute or the CFA

Institute Research Challenge with regard to this company’s stock..