Scope for Curro with 11m school chil­dren

The Star Early Edition - - OPINION&ANALYSIS - Amelia Mor­gen­rood

THERE is talk that Curro might be chal­lenged by con­strained dis­pos­able in­comes amid low eco­nomic growth in South Africa. In­vestors are wor­ried about the hefty val­u­a­tion lev­els – like it has al­ways been since the share was listed in 2011. This rich val­u­a­tion is af­forded to Curro be­cause of its su­pe­rior busi­ness model and fu­ture cash flows that is quite cer­tain. The track record is im­pres­sive. Since 2012:

Pupil num­bers in­creased by a com­pound growth rate of 31 per­cent.

Rev­enue in­creas­ing at com­pound growth rate of 48 per­cent.

Earn­ings in­creas­ing at com­pound growth rate of 83 per­cent

Op­er­at­ing mar­gins grew from 23 per­cent to 29 per­cent, and will prob­a­bly set­tle between 30 to 40 per­cent in the medium term.

But now there are ques­tion marks, which I be­lieve might be ex­ag­ger­ated. Par­ents will do any­thing for their chil­dren, they will make huge sac­ri­fices for a good ed­u­ca­tion.

I think this stock is more de­fen­sive than what the mar­ket thinks. At a price-to-earn­ings ra­tio of 97, it ap­pears over­val­ued, but did soften not too long ago.

The thing with Curro is that they will soon reach a point where ev­ery one child join­ing a school will al­most be pure profit for the com­pany. There is lots of scope for Curro, con­sid­er­ing that there are 11 mil­lion school chil­dren in South Africa, and Curro only caters for plus/mi­nus 47 000 of them (less than 0.5 per­cent!). Glob­ally in­de­pen­dent schools make up about 20 per­cent of the to­tal num­ber of schools, in South Africa it is only 4.4 per­cent.

Curro has very am­bi­tious growth plans, they have set their sights on 500 schools by 2030. Even if Curro stops build­ing schools, their cur­rent 127 schools are only at 52 per­cent ca­pac­ity.

End of 2015 the Curro share price went above R57, then as low as R37 six months later. Ever since it has been trad­ing in a band between R40 and R50.

Ter­tiary ed­u­ca­tion

Curro is bed­ded down very well in all lev­els of ed­u­ca­tion in South Africa. Now they are tak­ing on ter­tiary ed­u­ca­tion – iden­ti­fy­ing the gap very well – and will prob­a­bly gen­er­ate above av­er­age re­turns for their in­vestors with this ven­ture.

Curro’s suc­cess has ev­ery­thing to do with the dys­func­tion­al­ity of the South African school sys­tem and pub­lic ed­u­ca­tion, the same will go with this new ven­ture.

We have seen what is hap­pen­ing at uni­ver­si­ties the last three years and it is a bleak pic­ture. Curro is open­ing more doors for them­selves, and can eas­ily get to 100 000 stu­dents over the long term.

Chris van der Merwe, who has proven to be an amaz­ing chief ex­ec­u­tive, will head up the new ven­ture, Sta­dio. The tim­ing is per­fect now, Curro has gained a lot of mus­cle and can stand on its own feet.

Em­bury in Dur­ban dou­bled their 2018 in­take to 2 700 stu­dents, Wa­ter­fall Es­tate Cam­pus will be oper­a­tional by the end of this year with 1 600 stu­dents and Mon­tana will have a ca­pac­ity for 1 200 stu­dents. In June AFDA was ac­quired adding about 2 000 stu­dents. Their tar­get is to have 13 000 stu­dents when the firm lists in the third quar­ter of this year. The medium term tar­get is 35 000 and longer term 65000.


The sin­gle big­gest risk is that par­ents’ com­mit­ment giv­ing their chil­dren a pri­vate school ed­u­ca­tion is over­taken by their abil­ity to pay. I think that par­ents will give up quite a few other lux­u­ries be­fore they will give up this one.

An­other fac­tor to con­sider is that Sta­dio will need sig­nif­i­cant amounts of cap­i­tal to fund ex­pan­sion – just a re­minder that Curro had six rights is­sues. Though not ex­cep­tion­ally cheap at R43 a share, a good en­try level for long-term in­vestors.

For the record

In my col­umn on KAP last week I er­ro­neously stated: The busi­ness is well-struc­tured to weather cur­rent mar­ket con­di­tions and my best guess is that the bad eco­nomic con­di­tions in SA will have a DIS­MAL ef­fect on KAP in gen­eral.

I meant to say: …will have a LIM­ITED ef­fect on KAP in gen­eral.

The er­ror is re­gret­ted.

Amelia Mor­gen­rood is a re­gional direc­tor of PSG, a cer­ti­fied fi­nan­cial plan­ner, a mem­ber of the South African In­sti­tute of Stock­bro­kers and the In­vest­ment An­a­lyst So­ci­ety.

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