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Market Watch: Curro — the bells toll


Market Watch: Curro

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After studying the pri vate-education sector on the JSE, investors may want to raise their hands to ask two key questions.

First, why is there such a huge difference in the market ratings accorded to the two sector stalwarts, Curro Holdings and AdvTech?

Second, why — with such rich earnings multiples being accorded to Curro (and, to a lesser extent, AdvTech) — are there not more private-education contenders graduating onto the JSE?

The respective market ratings of Curro and AdvTech provide plenty of food for thought, especially as both counters are firmly in a growth groove. Curro holds a market capitalisation of R16.5bn against AdvTech’s R8.8bn.

AdvTech has a meaningful presence in the school and tertiary education sectors. It is about twice the size of Curro in terms of turnover and operating profit.

So a simple deduction would be that the market expects Curro to easily outstrip AdvTech in terms of pace of earnings growth. This theory is supported by the respective market ratings, Curro being accorded a dizzy 140 times trailing multiple and AdvTech a more modest (ahem) 32 times trailing multiple.

Of course, the historical multiples are almost irrelevant considering how rapidly Curro and AdvTech are growing their bottom lines. If we can assume another strident six months for both companies, we might generously pencil in as much as 50c/share in earnings for Curro and about 75c/share for AdvTech.

That would give Curro a forward multiple of about 80 times and AdvTech about 20 times. These are vastly different report cards for two star pupils, and it’s abundantly clear which company is the teacher’s pet — or the retail investor’s favourite.

At this point one has to recognise that Curro, which is controlled by Stellenbosch-based investment house PSG, has many more (excitable?) retail investors compared with AdvTech, which has a good number of institutional investors on its shareholder register.

Shareholder bodies aside, the questions revolve around whether Curro is overpriced and needs to rerate to multiples closer to AdvTech’s; or whether AdvTech’s prospects justify a rating closer to those of Curro.

Curro’s "story" is being supported by recent statements by CEO Chris van der Merwe that the potential size of the affordable private-school market has been underestimated.

He notes: "While it was originally assumed that the market will be saturated with 200 independent schools by 2020, it is now clear that the demand is far greater than the supply."

At the interim stage Curro hosted 41 393 learners in 110 schools on 47 campuses.

It seems clear that the company’s official expansion target of 200 schools by 2020 will be comfortably surpassed — remembering that Curro continues to pick up acquisitions (most recently Windhoek Gymnasium in Namibia and St Conrad’s College in Klerksdorp).

In assessing the realism of achieving a 200-school target, Van der Merwe points out that land-banking efforts have ensured Curro already has 170 schools in the offing.

The optimal rate for constructing new schools and campuses has been set at six campuses, or between 15 and 18 schools, a year.

A critical assessment of Curro’s model is the validity of its J-curve profit potential.

If the school division is broken down in the interim period to end June, Curro’s eight schools developed before 2009 achieved an earnings before interest, tax, depreciation and amortisation (Ebitda) margin of 30% while running at 86% capacity.

The six schools developed in 2011 managed a 32% margin running at 62% capacity, and the 16 schools developed in 2011 saw a 27% margin on capacity of 47%.

Perhaps more reassuring — considering that Curro has come back to the market for fresh cash every year since listing in 2011 — is that net cash generated in the interim period rocketed 157% to R203m, or 54c/share.

Van der Merwe’s assessment of the private-school market should also rub off positively on AdvTech. AdvTech has now broadened its core brands in Crawford College, Trinityhouse and Abbotts with acquisitions (Centurus and Maravest) that offer scope to play seriously in the affordable space dominated by Curro.

AdvTech’s growth in its schools division has picked up of late, with interim period revenue growing 20% to R822m and operating profit increasing 25% to R164m.

This compares favourably with Curro’s interim revenue growth of 24% to R872m.

AdvTech’s recent investor presentation pencils in some bold longer-term growth goals, most notably 2020 targets of R3bn in revenue and Ebitda of R650m from the schools division.

What is intriguing is that AdvTech appears not to lag behind Curro by a hefty margin in terms of potential for increasing learner numbers. While the presentation shows Crawford running at 84% of ultimate capacity, Trinityhouse is at 44%, Centurus at 70% and Maravest at 61%.

Of course, AdvTech’s X-factor is its diversified and re-energised tertiary offering, which covers brands such as Varsity College and Rosebank College, as well as specialist offerings such as Vega, Capsicum and distance-learning specialist Oxbridge.

While Curro’s tertiary pitch has just started, AdvTech has a fully functional tertiary bouquet that CEO Roy Douglas expects to generate R2.2bn in revenue and Ebitda of R450m by financial year 2020.

A new definition of what education entities may be accorded "university" status in SA could also enhance AdvTech’s tertiary offering — and significantly bolster prospects for a distance-learning brand such as Oxbridge.

There is also an air of confidence on AdvTech’s prospects, with Douglas pencilling in a "stretch target" of 100c/share in earnings in the year to end December 2018.

That puts AdvTech on a rather modest medium-term earnings multiple and — considering the strong cash-flow generation — a fairly nifty forward dividend yield.

Investors at this juncture might conclude that executive teams at Curro and AdvTech seem confident that their expansion plans are largely devoid of developmental risks that could stall the growth in profitable learner numbers.

What probably does constitute a more realistic threat are non-academic factors —brand-damage risks including such issues as racism and bullying, or government regulation (fees, curriculum issues and so forth).

In addressing the second question on why no other private-education companies have rushed onto the JSE to take advantage of the rich ratings, one must realise that the acquisition activities of Curro and AdvTech have probably accounted for clusters of education assets that might well have been packaged together for a JSE listing. Certainly Maravest and Centurus — acquired by AdvTech — seem to have the critical mass to have sustained standalone listing status and generated some market interest.

It remains to be seen if other larger private-education ventures (Reddam springs to mind) intend coming to the JSE.

But a few listed investment companies are quietly nurturing specialist private education interests.

PSG Private Equity appears to be making great strides with its distance-learning initiative, Impak. At present the scale is not awe-inspiring, but PSG Private Equity sees medium-term potential to become the number-one player in alternative education, with 200 000 learners and a profit after tax of more than R250m.

Those are compelling numbers that would easily sustain a separate JSE listing — a development that would speak to PSG’s strategy of floating off its more promising investments (with an opportunity to raise serious growth capital).

But would there be a temptation for PSG to reverse Impak, once it has been sufficiently bulked up, into Curro in exchange for additional shares?

RECM & Calibre (RACP) recently took control of distance-learning specialist College SA. RACP CEO Piet Viljoen reckons College SA has carved out an interesting niche in the education market.

He says a new management team (that has co-invested with RACP) has been installed "with a brief to up the quality of the offering and expand the reach of the business".

But it is early days, and RACP is valuing its 79.3% stake in College SA at cost — R22.3m. This represents just 2.3% of the net asset value of the total investment portfolio.

Another below-the-radar private-education venture is being nurtured in property-aligned investment house Trematon Capital, which holds control of Montessori-styled Generation Schools.

Generation has one school open in Sunningdale (a suburb in western Cape Town), but the Financial Mail hears plans are afoot for another school in Hermanus.

Generation CEO Jevron Epstein reckons there is potential for 20-30 campuses in the next 10-15 years, adding that the link with property-savvy Trematon is a huge advantage in land-banking initiatives.

"We also have a considerable advantage in that our schools are relatively small, and scalable into tertiary education offerings. Pupils may potentially only leave our schools at the age of 21, once they have achieved their degrees."

Overall, the report card shows there is a fair span of private-education opportunities on the JSE. With economic sweet spots awfully rare in SA these days, the sector warrants continued investor attention — although more concentration might be required in continually assessing market ratings in a climate where political and economic change look increasingly difficult to forecast.

The writer holds shares in Trematon, and his wife holds shares in AdvTech, Curro and RECM & Calibre.