TRADE OF THE MONTH
Going short on Curro and long on Advtech
Short on Curro, long on Advtech
The JSE’s private education sector, which must be ready to accommodate a few more listings this year, academically speaking, offers the perfect exercise in long and short trade.
PSG-controlled Curro Holdings is the excitable overachiever that has cast off the disciplines traditionally used in expanding education brands, and has embarked on the steepest of learning curves concerning potential profit growth.
Advtech is the diligent pupil that produces consistently solid results, though lately there has been a welcome streak of rebelliousness.
The trading opportunity is simple, at least on paper. Curro is extremely expensive, trading on an historic earnings multiple of nearly 200, while Advtech is considerably cheaper, with an earnings multiple of 24. To the uninitiated, the ratings might seem bizarre and imply that the upstart is much more likely to profit hugely from its fresh private education pitch than the learned old hand.
The highly rated Curro, which already has a meaningful schools footprint, has an ambitious goal of operating 80 schools by 2020, though the unofficial target is probably closer to 100. The company’s track record is relatively short, and the developmental risks are high — even if the company has not put a foot wrong since listing in 2011.
Though Curro has increased profits rapidly, the commensurate cash flows have not been sufficient to fund its expansion plans, which require substantial land banking and construction costs. Consequently Curro has tapped its shareholders a handful of times for fresh funding via rights offers, which have fortunately been easy to pitch at a decent discount to a sharply appreciating share price.
Advtech has been around for decades, and its steady-eddy profit proposition is built around academically brilliant brands like Crawford Colleges and Trinity House. The company also owns specialist tertiary education assets and personnel placement brands. For the last dozen years Advtech has been a citadel of consistent cash flow generation, which, coupled with a well-reinforced balance sheet, has allowed the company to follow a studious dividend policy.
More importantly for Advtech, its disciplined fiscal approach has meant the company has been able to embark on a R3bn expansion programme as well as complete the recent acquisitions of two smaller rivals (Centurus and Maravest) without having to resort to a rights issue — yet.
In the last 12 months Curro’s shares have surged around 35%, compared with the roughly 12% for Advtech. On paper, it should be a no-brainer to go long on Advtech — now with new growth plans firmly in place — and short on Curro, where the share price appears to have already confidently priced in the longer-term profit target.
Market lore would suggest that it is not usually prudent to short a PSG-aligned share. While Curro has scant backing from institutional investors, the shares are tightly held by what might best be termed “PSG friends and family”, who have been highly supportive of the company since listing.
But crunching some key numbers may convince punters that it might be worth pursuing our suggested long/short arrangement. If Curro triples its earnings in the next financial year, the share will still be on a forward earnings multiple of nearly 70. If the earnings of the year to end-December 2015 are doubled in the 2016 financial year, Curro’s current share price would offer a medium-term forward multiple of well over 30 — which is still significantly higher than Advtech’s historic earnings multiple.
Advtech, on the other hand, needs to take limited risks in markedly accelerating its historic growth patterns to chalk up profits that would put the current share price on a far more modest forward earnings multiple — perhaps even as low as 18.