Kroton Gains as Brazil Protests Seek Better Schooling

Kroton Educacional SA, the for-profit education company and the Brazil stock market’s best performer, is counting on government spending to fuel growth amid protests over poor public services.

Enrollment in Kroton classes should rise 10 percent to 15 percent annually in the next five years as more middle-class Brazilians get help paying for college, Chief Executive Officer Rodrigo Galindo said. That pace may accelerate further with the possible extension of student aid for so-called distance learning courses taken outside traditional classrooms, he said.

Many Brazilians are finding it almost impossible to land a spot in top public universities because of weak primary and secondary school education. Kroton is tapping into that pent-up demand for better schooling, one of the government services being assailed in demonstrations drawing as many as 1 million people in major cities this month.

“There is an enormous gap in quality for those students coming out of school, a gap that begins in elementary school,” Galindo said in an interview at Bloomberg’s Sao Paulo office.

Shares of Belo Horizonte, Brazil-based Kroton more than doubled in the 12 months ended yesterday, making the company the top performer on the 100-stock IBX index. That gauge slid 2 percent, while Brazil’s benchmark Ibovespa index plunged 13 percent as inflation erodes consumer confidence. The stock rose 4.2 percent, the most since April 22, to 30 reais at the close today in Sao Paulo.

$2.5 Billion Takeover

Kroton agreed in April to buy its biggest rival, Anhanguera Educacional Participacoes SA, in a $2.5 billion takeover. The deal will create the world’s largest education company, helping Kroton take advantage of the government’s goal for a 67 percent increase in college enrollment to more than 10 million by 2020.

“The perspectives for Kroton remain positive,” said Renato Prado, a Fator Corretora analyst in Sao Paulo. “The student body growth potential is evident, and margins can improve as a larger number of students means dilution of costs with fixed operational spending.”

Brazil ranked second-worst of 39 countries and one region on Pearson Plc’s Global Index of Cognitive Skills and Educational Attainment compiled in September. For every 100 students who begin elementary school, only 57 graduate from high school and seven obtain a higher degree, Kroton said in a presentation.

Widespread Protests

Protests rocking Sao Paulo and other major cities that have left at least four people dead show the gap between that reality and Brazilians’ aspirations. Demonstrators say Brazil’s investment of 30 billion reais ($13.6 billion) in the 2014 World Cup and spending on the 2016 Olympics Games is stripping funding from education and health care.

Brazil’s Chamber of Deputies approved a proposal today to earmark 75 percent of offshore oil royalties for education. President Dilma Rousseff had sought to have 100 percent of royalties go to education.

“The more people who graduate from high school, the bigger the market of people who want to go to college,” Luiz Carlos Cesta, an analyst at Votorantim Corretora, said in a telephone interview from Sao Paulo. “Higher education depends on government investment that keeps people in school.”

Cesta and Fator Corretora’s Prado are among 13 analysts in a Bloomberg survey who recommended buying Kroton. One rates the stock as underweight, and another, HSBC Bank Brasil SA’s Luciano Campos, is neutral.

Growth Questioned

Substantial enrollment growth in 2012 and 2013 “looks unsustainable,” Campos and a colleague, Caio Moscardini, wrote in a June 24 note. “We believe the market will peak in 2015.”

CEO Galindo said education companies still have room to grow, because the industry “is more resilient to the economy.” Kroton will be able to shave costs once regulators approve the acquisition of Anhanguera, expected within the next 11 months, Galindo said.

“We really like the education sector, its growth, and new student loan opportunities, the potential synergies between Kroton and Anhanguera,” Will Landers, manager of the $4.4 billion BlackRock Latin America Fund, said in an e-mailed response to questions. BlackRock said in a filing that its funds bought shares on June 14, pushing its stake past 5 percent.

Galindo said Kroton’s opportunities aren’t confined to Brazil. The company is poised to look abroad, initially in Latin America, where it already has identified numerous acquisition candidates, he said.

“A company that is a world leader at some point will have to look to the process of internationalization more closely,” Galindo said. “It’s a natural step.”

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