A problem at Curro
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?
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).
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