A study in succeeding
The private schools sector has been through challenges that some firms overcame better than others, writes Anthony Clark
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
“Covid-19 caused a fundamental shift in the way the market and investors view the sector. Technology is the buzzword today
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.
The worth of a corporate art collection does not reside solely in its current market valuation. Measuring the value of art objectively is almost impossible and, to date, it seems no indepth studies have attempted to do this beyond the perceptual level.
Much as a curator may want to avoid it, the question of a collection’s precise worth always comes up.
Fifty years ago, in most instances, the value of a corporate art collection received little consideration other than in comparison to other extravagant expenses a company’s board may have incurred. Corporate art collections seemingly existed as nothing more than office furnishings that depreciated over time.
Today, with the exponential increase of prices in the art world, some collections have become very valuable, justifying a rethink about how they should appear on company books and be managed by the corporation.
In this regard, there are pressures from two sides.
First, with the exponential rise in value the cost of managing a collection increases dramatically, as the risks associated with keeping and growing a collection expand too. The upside is the potential return on investment, but this is not so easily realised in an unregulated market that is extremely volatile due to issues relating to
sentiment and the potential of manipulation.
Second, there is an argument against retaining, and spending capital on, a nice-tohave trophy when there are more pressing societal needs.
The tension exists because
corporate art collections are not really perceived as assets deserving the same diligent care as any other company asset, but rather as part of a profile-positioning public affairs endeavour. It is therefore not surprising that companies would be under constant pressure to fund meaningful, highimpact programmes strengthening society at large.
Compounding matters is the fact that the prices for the works of young, emerging and successful artists are on a level with those of celebrated veterans in the market. This means building and sustaining an art collection with relevance to present-day progress has become a lot more expensive.
Further, the Covid-19 pandemic and various lockdowns have devastated the ecology of the art world. Institutions such as museums that exhibit art have had virtually no visitors. Corporate gallery spaces have suffered the same fate.
All round there have been no opening events or interaction with stakeholders, and even a flat-lining in sales. The immediate future is not promising, as the pandemic still needs to be contained effectively and the impact of vaccines remains unknown.
Digital-based transactions have somewhat filled the void. But providing a digital experience via the web is only a temporary alternative, as the scale, texture and colour cannot be replicated on LED screens no matter how clear the resolution. Being physically in front of real art remains the best way to experience it.
Though the corporate gallery space remains intrinsically secure alongside digital innovations, the raison d’être for a corporate art collection is under review. Some corporations may consider certain options while the art market anxiously awaits any alternative models that could emerge.
Things were different and perhaps even staid before the 2008 global financial crisis.
Collecting art has been a feature of the SA corporate landscape since the 1960s. Mirroring large corporations in the US such as Chase Manhattan Bank and IBM, SA companies that include Anton
Rupert’s international group, Standard Bank and Volkskas Bank (now Absa), to name a few, embarked on acquiring artworks over the past decades.
Motivations for the acquisi
“The few artists able to make careers internationally did so under challenging conditions
tions varied considerably, from enhancing the office environment to demonstrating support for artists. Rarely was the concept of “investment” or generating returns from the art collection a consideration.
Few corporations expected that art would be among the most highly valued commodities to be traded in a globalised world in the ensuing 50 years.
The art market in SA in 1970s and 1980s was plagued by isolation due to the politics of the apartheid government and the consequent protest and political instability against the regime. Artists and galleries struggled to survive in a constrained market limited to SA.
The few artists able to make careers internationally did so under challenging conditions, some never to return to their homeland.
Until the late 1980s and early 1990s certain private collectors, some museums and university collections, and several corporations actively participated in sustaining the art economy in SA.
This abruptly changed when a new SA arose as a successful democracy in 1994. A newly found confidence in and need to support the new democratic state came from corporations and individuals.
Some identified the visual arts as presenting the appropriate symbolism for encapsulating the unique SA experience of transitioning from repression to freedom. By buying and exhibiting art this way, a company could demonstrate its commitment to the new society while acknowledging the past struggle that served as the foundation for the new order.
Most corporations started art collections between 1994 and 2000. SA artworks, produced by now celebrated artists, were incredibly cheap then. For a fraction of the cost, a company could enjoy high exposure and recognition rather than funding a major advertising campaign. The unexpected benefit of a huge return on investment was still to come as the art market grew exponentially.
Not all of these collections remain as active today.
A celebrated example was Gencor, where the art collection formed an integral part of its rebranding exercise and the inauguration of its new head office in Joburg.
Selecting purchased and commissioned art works was expertly done by a team led by renowned art curator Kendell Geers, supported by CEO Brian Gilbertson.
Where is that collection today? It is now with South 32, a mining entity sold off after Gencor went through several iterations — as Billiton and then BHP Billiton.
One will be able to see a sampling of this collection at the Javett Art Centre in Pretoria in future. Though this collection’s current value is probably a few 100 times its acquisition cost, it has no presence on the company’s website or public communication.
Fortunately, the pressures described above and the attraction of generating a very good return on investment have not precipitated a sell-off by SA corporations.
Prices for SA artworks have grown exponentially since the 1990s, but the past few years have brought not only a flattening of this trend but in some categories a considerable devaluation, as certain artworks are no longer desirable as a new generation of collectors begin to fill the physical and virtual sales rooms.
When auction houses trumpet their successes with sixfigure “record” prices achieved for particular lots, this must be tempered with the reality that in many instances buyers with hard currency in their pocket can acquire top quality art at an up to 50% discount relative to prices achieved less than a decade ago.
Is selling off a collection the way? And if so, would it bolster the balance sheet? Not for companies that manage billions worth of assets. A randdenominated art collection will not make much difference.
It is not a given that such a move would publicly represent a sober re-strategising of priorities and cost saving. More likely it would be seen as a vacuous, easy way to appease a few croaking frogs in the stakeholder pond.
What the best corporate collections in SA share is a strong diversity of historical and contemporary works in various proportions. Corporate SA has not only over the past five decades played a significant role in preserving this country’s artistic heritage and supporting emerging talent, but in certain instances it has exported this to various parts of world. A case in point is Nando’s, which showcases SA artworks as an intrinsic part of its restaurant ambience in its eateries around the world.
While public institutions such as the Iziko SA National Gallery, the Pretoria Art Museum and the Johannesburg Art Gallery were once significant participants in the art world, they have begun to diminish as result of ideological myopia and due to fiscal issues. Like so many state-funded institutions, they are no longer able to fulfil their mandate as custodians of the country’s art, as their collections will remain frozen in time as acquisitions of important contemporary artists become impossibly expensive.
What has arisen in their place is the private art museum. In the past four years alone three such museums have opened in SA, all named after benefactors who have invested heavily in the art market.
These institutions, together with SA’s corporate collections, can play a crucial role in preserving the country’s artistic heritage for the future.
SA’s artistic heritage and contemporary talent is unique in its diversity. It sustains the creative thinking that this country requires to rise from present day and threatening crises. Collecting and showing off this talent from the past and the present is investing in the future. Cashing in, in the moment of Covid-19-induced crisis, or any other, for that matter, would be the worst thing to do.