REPORT CARD

The private schools sector has been through challenges that some firms overcame better than others

In the February 2020 edition of IM, a two-page report on Curro Holdings rated the stock a C+ for the two years of lacklustre results.

IM stated that management needed to knuckle down and work hard.

The counter then was trading at R15.00. Today it trades at R10 — still way off its Covid-19 low of 469c. The star pupil is now enduring corner time.

Then, in April, during the height of the Covid-19 market sell-off and the lockdown of the domestic economy, IM published another two-page feature on the education sector, discussing the merits of AdvTech, Curro, Trematon and Stadio. IM’s “wild card” pick was Stadio, trading at the time at 112c. Today, Stadio is at 215c — a return of 92%.

The latest report cards make for interesting, perhaps uncomfortable, reading. Stadio is up 33%, Curro is down 35% and AdvTech is 9% ahead on a oneyear perspective.

Covid-19 caused a fundamental shift in the way the market and investors view the sector. Technology is the buzzword today, alongside remote working. A year ago, education was a bricks-and-mortar business. Today distance, safety and security, and having a coherent and relevant online offering, are the key drivers in education strategy and pupil retention and growth.

Before surveying the schools stocks, it’s worth looking at Stadio, which is active in private higher education. From its Covid-19 low of 76c Stadio has been the best performing of the listed education stocks. Much of this was not by design or strategy; the company was just fortunate in the stage of its business development. It went into Covid-19 with a net cash balance sheet. It quickly deferred expansion, cut costs and played on its inherent strength — its online learning capabilities.

The schools stocks were not as blessed as Stadio in their repositioning and balance sheet strength. The lockdown hit the academic year and costs were higher due to Covid, students were kept at home and some parents started to struggle with school fees. This was the crisis point for schools stocks.

The tertiary sector, in which both Stadio and AdvTech operate, already had a high online learning capability. At Stadio about 80% of the 31,000 students study online. The companies have fewer bricks-andmortar assets, so they were far more insulated from the travails of Covid than the schools stocks, which had billions in assets, much of it often sitting empty during Covid-19.

Parents can yank children from private schools and resettle them in cheaper private alternatives, or, if push comes to shove, in a good local former Model C state school. But in the case of the tertiary operators, if students have started a course they usually follow though with it, as completing it directly affects their career and job prospects.

Stadio fared better than the schools sector, though at its high-end Milpark business school there was a drop in corporate-sponsored applicants. This should recover as the professional economy perks up.

A trading update imminent for its December 2020 year end as I write this, and I suggest the recent strength of Stadio is cause for optimism that its update will be better than the recent sector updates.

With Stadio’s headline EPS in the first half of 2020 having risen 21% to 6.9c a share and learner numbers after the interim stage having increased 8%, the market will keenly read how the company’s second half has fared and what Covid’s impact has been on results.

At 215c the easy money has been made from the recent lows. The company now needs to deliver solid results to justify the market’s faith.

Now to look at the schools sector, and in particular the two largest direct players — AdvTech and Curro.

For many decades the private education landscape in SA was dotted with myriad small independent schools and a few larger well-known groups such as AdvTech and the Redham Group.

The perception was that these upmarket schools, especially in the listed space, were fairly insulated from the travails of SA economics. Private education was a choice that many parents made and were willing to pay for to ensure a good education for their children.

But there was a growing market for a more affordable offering. Members of the new black-diamond middle class wanted to spend money on uplifting their children’s education. Many parents also wanted an offering that competed with

the former Model C schools.

Curro Holdings was founded in Durbanville by Chris van der Merwe with a single class in 1998 to tap into this trend.

Today the company has 76 campuses, 177 schools and about 60,000 pupils. It is the largest pure schools group in SA. PSG owns 60% of Curro.

Listed on the JSE at 400c in 2011, the counter at its zenith hit R59 in January 2016 as growth was powered by an insatiable school building and acquisition programme. This was funded by five rights issues and a load of debt, which was to be its eventual undoing. As debt piled up and results were softer than market expectations, the premium rating that Curro once enjoyed evaporated.

Over the past three years the stock has fallen 72.5%.

There have been earnings slips in these three years ranging from losses at the company’s low-end Meridian schools, impairment of assets or weaker than expected revenue and profit growth. The vaunted growth model sold to the market, funded by equity, stalled, and many targets were missed. As debt piled up to R3.6bn with high finance costs, Curro undertook another hefty and dilutive R1.5bn rights issue in August 2020 at 80c a share.

That caused a further skid in the stock.

After the market digested the rights issue, Curro started to pick up, and the stock reached R11.44 in late January.

Then yet another weak trading update was released in early February. The market caned the stock and Curro dropped to 14% lower than its pre-trading update levels, to R10 at the time of writing.

Curro detailed that once again there was a spluttering in its business model and strategy, aside from the expected one-off costs of dealing with Covid-19 and the disruption to the academic year.

The company said HEPS would slide 35%-45% from the prior levels, bad and doubtful debts from parents had risen, and a R63m provision made for this. Further, the heady expansion of the past years, which had led to land banking and a frenzy of building new schools, had again led to a further impairment of R202m. Pupil numbers in the second half of 2020 had fallen by 4.1%.

The market became concerned about the long-term future and expansionary drive at Curro within mid-fee private education. All of this dead floor space in a post-Covid academic environment was perhaps now a liability.

AdvTech, trading at R11.35, has enjoyed a slower but much steadier share price recovery. Like Stadio, AdvTech is a December 2020 year-end counter, and a trading update is imminent.

Interim results sparkled as the balance between schools and tertiary institutions played in AdvTech’s favour.

It had 78,500 learners at the interim stage, and was fortunate to have 59% of this number in the tertiary division — which historically has had better margins than the smaller schools division.

AdvTech has done much to pare costs from the bloated schools unit, despite its higherfee schools losing more pupils due to emigration and cost issues in recent results.

AdvTech has adapted its model and added a wider range of schooling price points between the high-end Crawford, the mid-fee Trinity house and a more middle-market affordable brand called Pinnacle. It has aimed to migrate students to lower-fee offerings within the group rather than lose them altogether.

Covid-19 affected the business as costs associated with the pandemic rose. However, AdvTech still delivered a solid 4% rise in interim operating profits with only a modest 8% fall in HEPS to 40c a share.

Nearly 70% of Curro’s pupils are from previously disadvantaged backgrounds.

The tax base of about 3.2million people who can, or could, afford private education, is shrinking, as jobs are lost and emigration rises, but there is clearly continued interest in private education and the company is still in only about 6% of the entire schools market.

Curro has cut costs and invested in an online learning platform, and the rights issue has pared debt by R1.1bn.

The company has acknowledged that its rampant expansionary phase was too aggressive, and IM expects it will focus more on utilising and filling its existing capacity rather than adding new floorspace. Acquisitions will continue as bargain opportunities arise due to Covid-19 constraints on small independent schools. The 2020 results should hopefully be the base for the Curro to rebuild its earnings reputation. It’s sadly missed that mark for years and gets a D-.

Stadio’s earnings multiple is “reasonable” and the group has a cohesive strategy towards practical real-world tertiary education that enhances career prospects. That strategy cannot be faulted and is ever more relevant today. But the easy money has been made and I’d need a solid trading update to galvanise me to maintain a buy.

AdvTech has been the dark horse. It had a tough 2019 as emigration and parents facing financial strain hit its more high-end, high-fee schools business more than Curro.

Much has been done to address and cut costs, realign fees and build more affordable schools under the Pinnacle brand. Interim results pleased the market, showing the resilience of the twin schools and tertiary model.

The benefits of schools restructuring also added to profitability.

As headmaster, I would rate the three stocks as follows: Curro is placed firmly in detention and needs to try harder. Stadio remains teacher’s pet, but needs to keep its report card healthy. AdvTech’s grades have improved over the year, and that has gained it the IM gold star.

At R11.35 we rate it a buy.

Covid-19 caused a fundamental shift in the way the market and investors view the sector. Technology is the buzzword today