Go­ing short on Curro and long on Ad­vtech

Financial Mail - Investors Monthly - - Contents - Marc Hasenfuss

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.

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