Qualicorp QUAL3.BZ
December 03, 2012 - 11:40am EST by
2012 2013
Price: 20.75 EPS $0.00 $1.10
Shares Out. (in M): 263 P/E 0.0x 18.9x
Market Cap (in $M): 5,464 P/FCF 0.0x 16.5x
Net Debt (in $M): 72 EBIT 0 0
TEV ($): 5,536 TEV/EBIT 0.0x 0.0x

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  • Brazil
  • Healthcare
  • Insurance
  • Insider Ownership


Qualicorp S.A. (QUAL3-BZ)

Share Price: BRL $20.75[1]; Market Capitalization: BRL $5,464 mm (USD $2,558 mm)[2]

2012E-2015E Revenue / Adjusted EBITDA CAGR: 26% / 27%

2014E TEV / Adjusted EBITDA: 10.3x; 2014E P / E: 15.0x; 2014E P / FCF: 13.5x


Key Investment Highlights

-          Fast growing membership base (1.2 mm lives growing double digits); underpenetrated addressable market

-          Unique business model which creates value for all constituencies and does not take underwriting risk

-          Leading position with significant scale and long-standing customer relationships

-          Industry leading financial profile with proven track record and management team

-          Significant management alignment with the founder/CEO owning over 25% of the equity (over $650 mm USD)

Key Investment Risks

-          Changes in the regulatory environment

-          Entry of new competition

-          Margin deterioration as churn/delinquency rates increase or new lives becomes more expensive to acquire

Key Financial Statistics

-          Strong revenue growth through combination of volume and price.  2008-2012E Revenue CAGR of over 42% with organic growth outlook of 20-25% going forward

-          Mid to high 30s Adjusted EBITDA margins, with potential to achieve 40%+ margins with scale benefits and process improvements over time.  Incremental margins have exceeded 40% even during periods of rapid growth

-          High FCF conversion (70-80% of Adjusted EBITDA) with negative working capital, minimal maintenance capital requirements, and advantaged tax status through Q1 2016


Overview of the Brazilian Health Insurance Sector

Brazil’s constitution provides for universal healthcare, funded through federal, state, and municipal taxes.  Rapidly rising health care costs have left the public system underfunded and challenged to provide adequate services. The public system typically involves significant delays in treatment and poor quality of care. Industry estimates show that existing infrastructure can provide access to less than 10% of the population.

Accordingly, the private healthcare sector has grown as citizens search for greater convenience and higher quality plans.  As of June 2012, approximately 26% of the Brazilian population had some form of private healthcare (up from 17% in 2003).  With surveys continuing to show private healthcare as a top aspirational product for Brazilian consumers, we believe there is a significant opportunity for private health plans to take further share as disposable incomes rise withBrazil’s rapidly growing middle class. 

Within the private healthcare sector, there are three primary options:

-          Corporate Plans: A direct contract between a corporation and a health plan operator.  Employees of large companies likely receive corporate coverage, but employees of smaller firms (lawyers, engineers, accountants, dentists, teachers, shopkeepers, etc.), likely do not.  As healthcare costs have risen in excess of inflation, many corporations have been scaling back benefits in order to offset rising costs.

-          Individual Plans: A direct contract between an individual and a health plan operator; heavily regulated by the Brazilian government.  In 1998, in order to protect individuals from unfair price increases by health plan operators, the government restricted premium increases above the initial rate to a general inflation index (which has been rising more slowly than medical cost inflation).  In addition, once signed, these plans cannot be cancelled by the insurance company, such that medical loss ratios may exceed 100% with no chance of remediation though either price increase or cancellation.  Due to these restrictions, many health plan operators have stopped offering new individual plans, while those that are available are priced at very high initial rates.

-          Affinity Plans: An indirect contract between a professional association and health plan operator.  The term “affinity group” refers to professional associations (such as lawyers, engineers, accountants, etc.) and their families.  An example of an affinity group would be the “Dentists of Sao Paulo” or the “Lawyers of Rio de Janeiro”. In 2009, in order to protect these groups from unwarranted price increases by health plan operators (any single group would likely have limited negotiating leverage), the Brazilian regulators disallowed direct negotiations between affinity groups and health plan operators and mandated that a benefit administrator (who would be pooling the purchasing power of multiple affinity groups) negotiate with health plan operators on their behalf.  

Based on direct discussions with the Brazilian regulatory authority, lobbying groups, and others in the healthcare industry, we believe any changes to the existing regulatory construct are highly unlikely.  The relatively recent implementation of existing regulations, the Brazilian government’s heavy bias towards consumer protectionism, and the extent of the public healthcare system’s woes further strengthen our view.

Business Description

Qualicorp S.A. (“Qualicorp” or the “Company”) was founded in 1997 with the goal of expanding access to high-quality, affordable private health plans to the public through affinity plans.  It has since grown into one of the leading full-service healthcare benefits administrators and health management services providers inBrazil, servicing over 1.2 mm affinity health members and over 2.5 mm corporate health lives. 

The Company primarily serves as an intermediary between health plan operators and affinity groups.  It pools over one million lives in order to negotiate prices with health plan operators that are up to 50% less than what individuals would pay for a comparable individual health plan.  At the same time, Qualicorp allows health plan operators to access high quality, high margin members while simultaneously providing a bulk of the administrative functions necessary to service such membership (sales, billing, customer service, collection, etc.).  As such, Qualicorp provides a valuable benefit to all stakeholders:

-          Consumers: provides access to high quality, affordable private health insurance plans

-          Health Insurance Operators: provides access to high margin new membership and associated administrative services. Qualicorp actively monitors and manages health care usage, lowering medical loss ratios and increasing collection rates such that insurers can potentially make more money on affinity clients despite lower prices

-          Professional Associations: helps associations retain existing members and stimulate new membership growth (increasing membership dues) by providing high quality, affordable healthcare coverage

-          Government: reduces the health care burden on an overextended public system; protects consumer interests by pooling the purchasing power of millions of members to negotiate lower healthcare premiums

Qualicorp’s business model does not assume any medical underwriting risk.   Its revenue is fee-based (predominantly calculated as a fixed percentage of monthly premiums), resulting in approximately 90% of its annual revenues being recurring, monthly payments.  Qualicorp charges both the health plan operator and affinity group for its services. 

Qualicorp has numerous avenues for future growth, including: further penetrating existing professional associations, increasing membership at existing associations, adding new associations, expanding geographically into new markets (currently over 80% of members reside in Sao Paulo or Rio de Janeiro), cross selling new products across its large membership base (dental, life, and homeowner’s insurance, for example), participating in healthcare inflation (as premiums rise), and acquiring smaller benefits administrators.  Relative to its existing membership base of 1.2 mm, the Company has identified specific professional associations with membership bases in excess of 22 mm for it to seek to penetrate.  While we do not believe Qualicorp will have 22 mm members anytime soon, we would note only 5% penetration of this identified addressable market would double its existing membership base. We are encouraged by recent agreements Qualicorp signed with three municipal governments (announced on its Q3 call), which could represent nearly 400k new lives over time.

Qualicorp is ~20x larger than its next largest competitor, and 7x larger than its next 3 competitors combined.  Each of these competitors has existed for 8-10 years and serves niche segments and geographies (we do not believe they are focused nor interested in direct competition with Qualicorp). We believe the Qualicorp’s scale advantage, market knowledge, and significant long-term relationships have reached a point where the capital required to provide comparable pricing and quality of service to customers is a sizeable barrier to entry.  While AON entered the market in 2011, its primary focus remains high ticket, corporate insurance brokerage.  AON has made minimal inroads in the affinity segment, with a stated goal to achieve 200k members by 2015 (vs. Qualicorp’s existing 1.2 mm), and a focus on the poorer, Northeast region ofBrazil, where Qualicorp currently does not compete.  Our diligence suggests that AON attempted to enter theSao PauloandRio de Janeiromarkets, but could not gain any significant traction in dislodging Qualicorp’s long-standing relationships.

Qualicorp S.A.                    
(BRL in mm)     2008A 2009A 2010A 2011A 2012E 2013E 2014E 2015E
Affinity Health Membership ('000) 0.374 0.461 0.669 0.954 1.287 1.435 1.615 1.818
% Growth     - 23.2% 45.2% 42.6% 34.9% 11.5% 12.6% 12.6%
Net Revenue     $228 $309 $470 $676 $929 $1,188 $1,418 $1,701
% Growth     - 35.8% 52.1% 43.8% 37.5% 27.8% 19.4% 19.9%
Adjusted EBITDA     89 101 174 251 332 444 537 653
% Growth     - 13.8% 71.4% 44.4% 32.3% 33.7% 20.8% 21.5%
% Margin       39.2% 32.8% 37.0% 37.2% 35.8% 37.4% 37.9% 38.4%
Adjusted Cash EPS   - - $0.32 $0.55 $0.89 $1.10 $1.38 $1.74
% Growth     - - - 72.7% 61.2% 23.3% 25.9% 25.8%



I do not hold a position of employment, directorship, or consultancy with the issuer.
I and/or others I advise hold a material investment in the issuer's securities.


-- integration of acquisitions
-- continued 20%+ revenue/ebit growth
-- increased liquidity with recent Carlyle sale
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