Acorns that may become oaks

PLG’s schools were formerly hotels, conference centres and wedding venues

Don’t expect profits from PLG immediately; it will have to grow and expand its network

T wo small companies have recently caught my eye. The first is a former down-and-out tech micro-cap that has been resuscitated into a profitable new entity, and the second a forthcoming Alt-X listing in the local affordable schooling sector.

Ansys, with a market capitalisation of R635m, has a portfolio of technology businesses in the rail, mining, defence, information security and telecommunications sectors.

It has been heavily loss making as the current chairman and former CEO and majority shareholder, Teddy Deka, rationalised and restructured an old business he bought into. But after a near two-year turnaround, it is in the black and well positioned for the future.

There have been three key growth areas for the company in the past year.

The first is fibre-optic services in the telecommunications division. There should be a few more years’ growth as SA upgrades its telecoms backbone.

The second is mine safety solutions. As mining companies become more cognisant of workers’ health and safety, money is being spent on this.

The third is technology to monitor wagon and locomotive movement. Transnet is upgrading the monitoring and tracking of its vast rail stock.

You could have bought into Ansys at 30c/share two years ago. It’s now 140c, as the market has rewarded it for its return to profitability, and earnings growth. Its interim results to September 2016 showed revenue rising by 164% to R409m, profit before tax up by 710% to R48m and HEPS increasing by 472% to 7.57c/share. I’m forecasting 17c/share by March 2017, which at the time of writing places Ansys on a 8.2 p:e.

I’m not suggesting Ansys is a high p:e stock, but if earnings are as the chairman expects, a sizable business could begin to grow and then the company will start looking cheap.

A new listing in the schooling sector will be Pembury Lifestyle Group (PLG). This small business, with about seven campuses, 19 schools and 1,910 pupils, plans to list on the Alt-X in late March to raise R140m at an issue price of 100c/share, to value the business at a modest R350m. It will be the minnow in the listed education sector, dwarfed by ADvTech and Curro Holdings.

But it was not that many years ago that Curro was valued at a mere R100m, when PSG Group bought into the unlisted company for R50m. From little acorns mighty oaks may grow. Curro is now worth R20bn. I’m not suggesting PLG is the next Curro, but PLG does have an interesting and affordable low-cost offering that seems scalable, and plans to have 13 campuses with 9,000 learners, revenue of R390m and net profit of R95m by 2020. CEO and founder Andrew McLachlan says PLG could probably grow faster than the forecast rate.

What’s different about PLG’s school model is that its fees are slightly lower than its listed sector competitors — between R18,000 and R54,000/year. It also opens its schools faster and more cheaply than its competitors, as it does not build turnkey sites. Instead, its buys sites in residential areas in and around Gauteng which have had “other uses”. Its schools were formerly hotels, conference centres and wedding venues.

Don’t expect profits from PLG immediately; it will have to grow, gain classroom critical mass and expand its school network. It took several years for Curro to turn a fair profit.

If I were an investor who’d missed out on the early gains in Curro, I would perhaps take a small bite at PLG. It is a small player in a fast-growing market. It has modest ambitions to expand into other regions. For the patient it could be an interesting sector play, albeit riskier than the bigger boys. That it might get bought out adds an interesting dimension.

If I were an ADvTech or Curro shareholder, taking a small percentage of my gains and investing it in PLG may not seem like a bad idea.