A prob­lem at Curro

Financial Mail - - MARKET WATCH - @mar­chasen­fuss

Shares in Curro Hold­ings were not en­thu­si­as­ti­cally marked up af­ter the re­lease of muchim­proved profit growth num­bers in the half-year to end-june. On a year-to-date ba­sis the share price is about 30% lower, though the p:e re­mains at a de­mand­ing 48 on a for­ward ba­sis.

While the J-curve growth tra­jec­tory looks fairly con­vinc­ing in Curro’s main body of af­ford­able pri­vate schools, there may be wor­ries about prospects for low-fee sub­sidiary, Merid­ian. It ac­counts for about 11% of Curro’s rev­enue and just 6% of earn­ings be­fore in­ter­est, tax, de­pre­ci­a­tion and amor­ti­sa­tion (ebitda). But it causes a drag on earn­ings and will con­tinue to do so un­til Curro’s main­stream of­fer­ing grows much big­ger or Merid­ian turns around.

While some may feel Merid­ian is a phil­an­thropic ex­er­cise, it might be dis­con­cert­ing for some Curro share­hold­ers that a hefty re­cap­i­tal­i­sa­tion ef­fort is un­der way. Curro, as a 65% share­holder, aims to re­deem “ex­pen­sive” in­ter­est­bear­ing debt of R390m. This means Curro will in­vest R253m into Merid­ian — an ex­er­cise that the Psg-con­trolled group hopes will sig­nif­i­cantly im­prove prof­itabil­ity at the lower-fee ven­ture.

In the in­terim pe­riod, Merid­ian in­creased rev­enue slightly to R140m (pre­vi­ously R136m), but an in­ter­est bill of R35m eroded ebitda of R24m to push the sub­sidiary R12m into the red.

What is prob­a­bly most wor­ry­ing is that the mar­gin has been whit­tled down to 17% from the more re­as­sur­ing 23% seen in fi­nan­cial 2016 and the 20% recorded in 2017. This is in stark con­trast to Curro’s top schools, where a ca­pac­ity of 70% en­sures mar­gins of about 40%. Even Curro’s newer schools, where ca­pac­ity sits at un­der 50%, man­age a mar­gin of 22%.

Fix­ing Merid­ian’s fi­nan­cial struc­ture is one thing, but it will be quite an­other to fat­ten the mar­gins in a lower-fee model to more vi­able lev­els. Is a breakeven sit­u­a­tion the best Curro share­hold­ers can hope for?

Il­lu­mi­nat­ing trans­ac­tion

ARB Hold­ings — which al­ready con­trols the peren­ni­ally prof­itable Eurolux light­ing busi­ness — could pay as much as R117m to buy the loss-mak­ing Ra­di­ant light­ing busi­ness from South Ocean Hold­ings (SOH).

ARB says Ra­di­ant of­fers ac­cess to a lead­ing light­ing brand and a chan­nel to a mar­ket in which Eurolux has very lit­tle cur­rent rep­re­sen­ta­tion.

In other words Eurolux will con­tinue to fo­cus on its strength in the (more vi­brant) re­tail busi­ness and Ra­di­ant will fo­cus on the (con­sid­er­ably dim­mer) whole­sale, con­struc­tion and project sec­tors of the mar­ket.

ARB is also ac­quir­ing five Jo­han­nes­burg-based prop­er­ties worth R88m.

The last stated tan­gi­ble NAV of the busi­ness be­ing ac­quired — to­gether with the prop­er­ties — was about R200m. But Ra­di­ant’s at­trib­ut­able losses to SOH for the six months to end-june were about R11.5m (in­clud­ing im­pair­ments and write-downs of R13.2m).

Mark­ing time

Tru­worths’ re­cent re­sults make no men­tion of whether long-serv­ing CEO Michael Mark will quit any time soon.

Read­ers may re­mem­ber that Mark was set to step down some years ago when in­ter­na­tional re­tail ex­ec­u­tive Jean-christophe Garbino was ap­pointed Ceo-des­ig­nate. Mark, how­ever, was re­luc­tant to give up the CEO seat, and a frus­trated Garbino even­tu­ally de­parted.

Of­fi­cially, Mark was meant to stay on un­til the end of 2017.

It’s dif­fi­cult to spec­u­late whether Tru­worths would have been bet­ter off in new hands, or whether Mark’s 25 years of ex­pe­ri­ence as CEO has lim­ited the dam­age in what is a thread­bare time for fash­ion re­tail­ers.

Change does seem to be on the horizon. The board has ap­pointed CFO David Pfaff to the newly cre­ated role of COO. He will be re­spon­si­ble for re­tail store op­er­a­tions in ad­di­tion to credit risk, credit op­er­a­tions, in­for­ma­tion sys­tems and fi­nance. Could this be some sort of suc­ces­sion plan­ning?

Change seems to be loom­ing at Tru­worths, where the board has ap­pointed CFO David Pfaff to the new role of COO

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