Earnings from learnings
The education sector on the JSE is an interesting place. Aside from the Generation Education business in Trematon Capital you can’t access directly because of the other stuff in Trematon, you can pick and choose from AdvTech, Curro and Stadio.
Despite all being in a similar broad sector, the underlying businesses are very different.
Curro and Stadio used to be part of the same group before Curro gave shareholders the choice of primary and secondary education vs tertiary education by unbundling Stadio and listing it separately.
Primary and secondary education require vast facilities (sports grounds and the like), whereas tertiary is a far less capital-intensive model that includes a significant online component. The type of competition also differs, as primary and secondary education are as much about location as anything else, whereas tertiary is more about the specialist nature of the qualifications and their pricing.
AdvTech has primary and secondary schools in South Africa and other African countries (think high-end international schools in places such as Botswana and Kenya) and there’s a large tertiary education business as well. It also has a resourcing division unrelated to the education business which is small in the group context, so most people think of AdvTech as an education business that gives you a combination of Curro and Stadio.
AdvTech has been the pick of the litter in terms of share price performance over the past 12 months, up by a glorious 72%. Headline earnings per share (HEPS) growth is strong, with a recent trading statement highlighting a surge in HEPS of between 16% and 21% for the year ended December 2023.
We will know more when detailed earnings are released, but for now this is encouraging.
Over at Stadio, we find the other end of the share price performance spectrum. Up by just 7.5% over 12 months, growth has been priced in, confirmed by modest share price growth despite HEPS for the year ended December 2023 increasing by between 17.6% and 27.6%. These are great numbers, but you’re paying for them. On a full-year HEPS range of 23.5c-25.5c, the Stadio share price of R4.90 is a p:e multiple of about 20. That’s a big ask for a South African mid-cap.
For comparative purposes (while recognising that AdvTech is broader than Stadio’s business and more capital intensive), AdvTech’s range of 169.9c177.3c for HEPS suggests a p:e multiple of about 16.5 at the midpoint of the earnings range. The multiple is a lot closer to Stadio than it was a year ago, which is why AdvTech shareholders have been smiling far more broadly than Stadio shareholders over the past 12 months.
Be careful with extrapolating the trend, as a multiple reversion opportunity such as AdvTech vs Stadio over the past year closes over time if it works out. AdvTech’s multiple also requires significant ongoing growth to be justified.
Feeling the crunch
This brings us neatly to Curro, where the challenges of the South African middle class are being felt in a big way. Whereas the tertiary businesses in Stadio and AdvTech are all about career advancement and the schools in AdvTech are aimed at wealthier South Africans, Curro competes squarely against good government schools and more affordable private schools.
This is a highly competitive market facing just about every headwind you can think of in South Africa, from emigration trends to interest rate pressures on consumers. The growth dreams that led to ridiculous valuation multiples for Curro around 2015/2016 are long dead. The worry is that expectations have been tapered back further in the past year, with Curro raising impairments on schools that aren’t filling up quickly enough.
Curro has spent years trying to address the issue of schools operating below capacity. In a significant strategic shift, it ramped up tuition fees and grew that revenue line by 12%, a direct result of pricing rather than volumes in 2023. This gave it an excellent boost in HEPS of 19%, but is this focus on pricing a sustainable strategy in a competitive market?
The share price is up 40% in the past year off a low valuation base. With fullyear HEPS at 73.2c, Curro is trading on a p:e multiple of about 15. Considering how much of this boost came from tuition fee increases that probably aren’t sustainable in the South African environment, I would tread carefully at this valuation. It’s also important to wait for AdvTech to release detailed numbers for the year for a proper comparison to be made. As for Stadio, I can’t bring myself to pay 20 times for it.