Time to mark private educators

Providing an alternative to state schooling is not simple, but there are certainly profits to be made

An AGM is a must for any JSE-listed company and it is a forum for any shareholder to quiz the boards of listed entities. But hardly anybody ever attends — especially the institutions that manage our hard-earned money. There are exceptions. The PSG Group AGM in Stellenbosch is more like religious worship than a report-back session.

I attend dozens of AGMs and am often the only outsider, so I get the board to myself. They are often so pleased to see anybody they will happily engage and answer any relevant questions.

I participated in three such AGMs recently, all in education stocks. AdvTech, Curro Holdings and Stadio Holdings had their AGMs within a fortnight. In every case I was the only analyst who quizzed management.

Private education has fairly predictable earnings, is cashgenerative and offers a service that is persistently in demand — even more so given the deterioration of state education.

In the past 12 months the listed education space has been in detention.

AdvTech year to date is down 4.5%, Curro Holdings 3% and Stadio Holdings 6.2%.

So why do I like the space, and which counter stands out as a possible A+ candidate?

AdvTech listed on the JSE in 1987 and has a good portfolio of schooling and tertiary brands.

Its tertiary businesses have been the star performers over the past years. Curro Holdings

made a hostile bid for AdvTech in mid-2015 and to beat this off, AdvTech went on a huge expansion and acquisition spree which has failed to generate the earnings in the schooling side to justify such a spend.

AdvTech’s pricier schooling brands have seen a loss of pupils because of emigration, and trading down has hurt profits. Only the tertiary side has shone. My AGM feedback confirms that schooling is a tough place for AdvTech, with a need to cut costs and restructure. It all takes time.

Curro, the sector upstart, emerged from PSG Private Equity and listed on the JSE’s AltX market in 2011. From an original R50m investment by PSG for 50%, the entire company today is valued at R10bn.

Growth has been funded by rights issues. Curro has rapidly built new schools or acquired and rebranded existing schools, principally in the affordable midrange schooling price points. It has grown to 55,000 pupils over the past decade.

The stratospheric p:e rating — over 1,000 times at one point —

“My AGM feedback confirms that schooling is a tough place for AdvTech, with a need to cut costs

continues to daunt at 40 times, but growth in its J-curve strategy is now starting to kick in as latent capacity is filled.

Concerns and losses over its Meridian joint venture with Old Mutual in low-fee schools caused an earnings and share price speed wobble in 2017/2018.

The recent AGM confirmed that Curro has regained its footing. But a period of “tension” is ahead as rapid expansion will test management and add to debt and finance costs. Earnings growth will be tempered as Curro “grows into itself”.

Then there’s Stadio, the spinoff from Curro in 2017 that houses the tertiary assets. It has a tried and tested CEO in Curro founder Chris van der Merwe, the backing of PSG Group and a clear and stated vision of growth to 2026.

Van der Merwe told the AGM audience not to expect a rights issue any time soon “unless we buy Wits”. I do expect one rights issue, probably in 2020/2021, to help repay accumulated debt from two mega-campuses Stadio intends to build for R800m in Cape Town and Joburg (both to open in 2021). Stadio has handsomely exceeded its prelisting statement earnings, though its earnings multiple is a deathdefying 41 times.

All three listed education counters have the potential to make a handsome profit for shareholders. Having covered the sector for some 20 years, I’d give Stadio Holdings an A+, given the track record of its founder and its long-term strategy.