Scope for Curro with 11m school children
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.
Risks
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.