Amid re­ports of trou­ble in gov­ern­ment schools, the pri­vate-ed­u­ca­tion sec­tor is on a steep (l)earn­ing curve. But which counter has the most merit?

Financial Mail - Investors Monthly - - Contents - Marc Hasen­fuss

STA­DIO Share price: 590c JSE code: SDO

BUY THIS TER­TIARY ed­u­ca­tion ven­ture has made a fine start by ac­quir­ing sev­eral niche brands — Mil­park, South­ern Busi­ness School, Afda and Lisof — to com­ple­ment its Em­bury brand.

While de­liv­er­ing low-cost, high-qual­ity pri­vate ter­tiary ed­u­ca­tion will ar­guably be more chal­leng­ing than rolling out a schools net­work, CEO Chris van der Merwe (who founded and built up pri­vate-school busi­ness Curro) is rel­ish­ing the chal­lenge.

He reck­ons Sta­dio is on course for R41m in af­ter-tax prof­its for the 2018 fi­nan­cial year, and that the goal of 56,000 stu­dents by 2026 will be achieved. With this many stu­dents on hand, Sta­dio will have an af­ter-tax profit po­ten­tial of R500m.

The X-fac­tor is what Sta­dio can bring to the ta­ble in the form of ac­qui­si­tions. IM un­der­stands that size­able op­por­tu­ni­ties are un­der con­sid­er­a­tion. Smart ex­pan­sion of fac­ul­ties — in­clud­ing “sweet spots” like en­gi­neer­ing and medicine — should also en­sure a com­pelling of­fer­ing at what Sta­dio en­vis­ages as a “mul­ti­ver­sity”.

Van der Merwe de­liv­ered much more than what was ini­tially promised at Curro, and IM be­lieves he will do the same at Sta­dio. Sta­dio’s shares have drifted away from a high of close to 900c — per­haps on ex­pec­ta­tions that ac­qui­si­tion ac­tiv­ity might ne­ces­si­tate a rights is­sue. It could be a smart time to en­rol.

AD­VTECH Share price: R15.70 JSE code: ADH

HOLD THIS IS A well-es­tab­lished pri­vate-ed­u­ca­tion con­glom­er­ate that op­er­ates in the schools and ter­tiary spaces as well as ex­tend­ing into the train­ing sec­tor via its size­able re­cruit­ment di­vi­sion.

Re­cent pres­sure on en­rol­ment num­bers in the high-end pri­vate schools seg­ment — where flag­ship brands Craw­ford Col­lege and Trin­ity House are ma­jor play­ers — was off­set by a more vi­brant show­ing in the well-di­ver­si­fied ter­tiary op­er­a­tions.

The group, ever since ri­val Curro’s aborted takeover bid, has been growth­fo­cused. Though Ad­vTech has adopted a mea­sured ap­proach to ex­pan­sion, there is scope for rop­ing in ad­di­tional spe­cial­ist ter­tiary brands and build­ing a schools foot­print in se­lected African coun­tries.

In terms of mar­ket rat­ing, Ad­vTech trades at a fairly de­mand­ing earn­ings mul­ti­ple — but this rat­ing must be viewed against the group’s abil­ity to pro­duce solid earn­ings growth and pay reg­u­lar div­i­dends. Cash con­ver­sion is ex­cel­lent and mar­gins have been well-main­tained. Ef­forts to in­crease ef­fi­cien­cies in the schools di­vi­sion should also per­haps not be un­der­es­ti­mated in term of po­si­tion­ing a “leaner and meaner” Ad­vTech for a profit dash when the econ­omy is not pinch­ing con­sumers.

Mean­while, Ad­vTech’s ef­forts to roll out a more af­ford­able pri­vate-school of­fer­ing should be watched closely.

CURRO Share price: R31.95 JSE code: COH

SELL GLANC­ING OVER CURRO’S lat­est fi­nan­cial re­port, an in­vestor would bat­tle to find flaws. Rev­enue growth is sprightly, mar­gins im­prov­ing, cash flow in­creas­ing and bottom-line growth rolling along.

En­rol­ments (aside from a set­back at lower-fee ven­ture Merid­ian) look re­as­sur­ing, and the de­vel­op­ment pipe­line, backed up with smart land bank­ing en­deav­ours, re­mains vi­brant.

So why has Curro’s share price — fol­low­ing the un­bundling and sep­a­rate list­ing of ter­tiary ven­ture Sta­dio — shed more than 35% over the past 12 months?

There may fi­nally be a re­al­i­sa­tion that Curro — as great as its busi­ness model is — can­not gen­er­ate the prof­its to jus­tify its shares trad­ing on a trail­ing earn­ings mul­ti­ple of more than 65 times and a for­ward mul­ti­ple of 50 times. The mar­ket rat­ing is dou­ble the rat­ing of ri­val Ad­vTech, which — though likely to grow at a slower pace — is a lower-risk propo­si­tion in terms of ex­pan­sion ex­e­cu­tion. As­sum­ing a “more mod­est” for­ward earn­ings mul­ti­ple of 30 times is more ac­cept­able to the mar­ket, Curro’s share price could drib­ble down­wards for the next few months.

It’s not easy to chalk up a SELL on an ex­cit­ing high-growth share like Curro — but let’s just say there may be a bet­ter time to buy the stock later this year.

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