Private schools proving to be paths to profit
ADVANTAGE: INEFFICIENCIES IN GOVT INSTITUTIONS ARE PAVING THE WAY Private education model is highly cash-generative.
Globally, governments allocate roughly 16% of annual revenue to education, compared with South Africa’s 20%. This is according to Victor Mupunga, research analyst at Old Mutual Wealth Private Client Securities, who says this points to a skewed cost structure rather than the actual amount spent on education, as many critics assume.
“A recent paper by the International Monetary Fund echoed these findings, highlighting staff compensation as one reason for the SA government’s dismal delivery on its education investment.”
The department of basic education’s 2018-2019 annual report confirms that SA’s schooling system struggles with inefficiency, caused by high levels of grade repetition, low levels of learning achieved by those in school and high dropout rates from grades 10 to 12.
Damon Buss, equity analyst at Electus Fund Managers, says private education makes for a compelling business model.
Mupunga says the private school model is highly cash-generative.
AdvTech
The AdvTech group provides primary, secondary and tertiary schooling and has a job placement business. “From an investment perspective, we typically like businesses with some diversification and AdvTech has a differentiated offering from a stage-of-life perspective,” says Mupunga.
Once the key criteria of a good location and appropriate cost structure have been met, it becomes a case of “bums on seats”. “The operational leverage is high and after a school breaks even, additional enrolments fall through to the profit line,” he says.
Looking at the mid-fee sector, the AdvTech group has a growing number of schools under the brand name Pinnacle Colleges, which is reporting strong growth. This hedges the group to some extent against the current difficult economic environment.
Curro
Curro offers primary, secondary and tertiary education. One of the key differences from its competitors is that Curro has unbundled its tertiary offering in the form of Stadio Holdings, which is a major contributor to profits. Curro has also expanded its offering with the launch of DigiEd, a new tech-focused school model.
Mupunga says that in terms of growth, Curro is more aggressive, leaning towards spending close to R2 billion in the next few years. However, it has doubled the number of students in the past four years. At the end of June this year, there were just over 57 000 pupils spread across all schools.
Challenges
Buss says the recent performances of both AdvTech and Curro have been “unsurprisingly weak”, given the macroeconomic conditions. He says two key factors impacting profit margins at both companies are affordability and emigration.
“If we compare the two companies, AdvTech’s return on invested capital has steadily declined over the past 10 years, from 33% in 2008 to 10% in 2018. An aggressive acquisition and expansion strategy in 2015 was the key driver of the decline in return on invested capital to below AdvTech’s cost of capital.”
Curro’s return on invested capital remains very low at 3.2% last year, due to the business still being in a growth phase. Buss believes the Curro school model is superior to AdvTech’s because the lower average fees equate to a far bigger potential customer base and the centralised model with shared services makes it more profitable.