HILTON TARRANT: After warning the market of a possible rights issue a few weeks ago, Curro Holdings, the private education group majority owned by PSG, today announced plans to raise a further R606m. It also announced its maiden profit since listing just over 18 months ago. Earlier I spoke with chief executive Dr Chris van der Merwe and asked him why the company was raising money through the issue of shares for the third time since listing on the JSE.
CHRIS VAN DER MERWE: Yes, I think let’s explain this to the listeners. Curro Holdings will only embark on a rights issue if we fully believe in the market potential in terms of the number of opportunities that we have. Now, last year we constructed five new schools and the enrolments were really excellent. So that gave us a lot of confidence that the market really believes in this product. And we identified a couple of opportunities for 2013 – namely that we want to develop anything in the region of 10 new schools this year.
HILTON TARRANT: So in terms of the rights issue is this the most effective way of raising capital?
CHRIS VAN DER MERWE: Yes, it’s always a combination between bank financing and using money from the equity markets. So we always do it in a combination, but only if we have faith that we can complete all the developments.
HILTON TARRANT: Just looking at the rate of growth, in this period – if you look at 2011 versus 2012 – the number of learners at Curro schools more than doubling, your revenue more than doubling, is this the kind of growth rate we can expect or is this the beginning of a curve that perhaps will start to flatten out?
CHRIS VAN DER MERWE: We had a strategic planning session last year where this was discussed in depth, also in terms of doing market analysis. And we reformulated our promise, which we made during the prelisting statement, namely, as you remember, we promised the market 40 schools by 2020. And the new vision is 80 schools by 2020. So to answer your question, the potential in terms of development is still very, very strong and in terms of our growth, last year we were 12 473 kids, making a profit of R50m-odd. For this year we have enrolled 20 840 kids, so you know the listener can deduce what kind of profits we can forecast for end of this year. So as long as the new schools fill up, Hilton, the trend will go on.
HILTON TARRANT: Getting those new schools to capacity – that typically takes a number of years, though.
CHRIS VAN DER MERWE: It depends, you know. We had a surprise. From the five new schools we constructed let me give you some examples. We started Curro Thatchfield in Centurion approximately a month ago, a brand new school; we wanted to open the school with approximately 250 kids. We opened it with 800 kids on day one. So we believe that the trademark has now established the kind of norm where the parents believe it’s a value product, that it seems to us that the new schools that open with a critical mass bigger than anticipated. …
HILTON TARRANT: Chris, I want to talk about the cost of education. I had a fascinating discussion with Adrian Gore from Discovery yesterday in terms of the cost of healthcare, and how that outstrips the kind of median inflation that every South African would be comfortable or familiar with. You’ve got this inflation rate of round about 5%, 5.5%, 6% yet certain things – as he rightfully points out – increase at a rate faster than inflation, and certain things increase at a rate lower than inflation, obviously thereby getting the average. The cost of education – is that increasing higher than the average inflation rate?
CHRIS VAN DER MERWE: There’s definitely a norm in terms of the provision of education and we have pinned that norm down to approximately 10% per annum. We refer to that as educational inflation and obviously there are several reasons why that is a bit higher than Cpix.
HILTON TARRANT: What would those reasons be?
CHRIS VAN DER MERWE: Yes, you’ve got to understand that if you want to maintain good standards you’ve got to look after your staff. So you’ve got to give them good salaries and in order to keep your good staff members you must rely on school fees. Now, when we engineered our model in the year 1998, the model was actually forecasted for the next 20 years. And in terms of our model we worked on school-fee escalation of anything between 8% and 10% as long as inflation would then be round about 5% to 6%. So I would guess a fair answer would be that your educational inflation would always be about 2% above normal inflation.
HILTON TARRANT: Chris, around the cost of education we look at school fees at some of the ex-Model C schools. I think if schools like Pretoria Boys High, Parktown Boys, SACS, Rondebosch, DHS – very well-known schools – where school fees are sitting very close to or exceeding R30 000 an annum. You’ve got your high-end private schools where your school fees are sitting at anywhere, three, four, five times that amount. Where does Curro fit in?
CHRIS VAN DER MERWE: OK, let’s just focus on our several brands. We only have one select school, which really one can refer to the high-fee market, and that’s the Woodhill College that we purchased in Pretoria East. So let’s just eliminate that, because that is in a particular segment.
Let’s focus on the Curro traditional schools and also on our Meridian brand. Curro still sells very popularly at approximately R2 500 for a primary-school kid per month, so you must multiply that by 12. And the high-school division of our Curro brand sells at approximately R3 500 to R4 000 a month. So you mentioned about five, six times – that’s not the case, it’s about twice. Then obviously our Meridian brand is a flat rate of approximately R1 300 per month.
Now obviously the class sizes are a bit bigger in the Meridian brand and the subject choice is reduced to the bare minimum. So that’s the market that we play in.
HILTON TARRANT: Our thanks to Dr Chris van der Merwe. Wayne, this story up till now seems to be really incredible in terms of rapid growth that Curro has undergone. They expected 10 000 learners in their system, in their schools, by 2016. today they’ve got 21 000.
WAYNE McCURRIE: There’s no doubt whatsoever there is an increasing demand for private or I wouldn’t like to call it affordable private education, but…
HILTON TARRANT: Slightly more affordable.
WAYNE McCURRIE: Slightly more affordable than R70 000 a year at a posh private school. So unquestionably there is demand for this. The only question is: has the share run too much that you can go and buy it?
But two good things. First of all, there is a profit here. You can at least start evaluating some sort of normalised margin now. How are they doing? So you can do, I think, a more realistic valuation of the share than when it was totally and utterly in their start-up phase. So it’s a bit easier to analyse now. Whether the P/E is 100 or whatever, at least you can do an analysis of it. And they are doing what the share market is there for – to raise capital when you need it.
HILTON TARRANT: They’ve given us in today’s announcement some indication of, from the day that they opened the school, as the years progressed, what that EBITDA margin and the cash flows look like in their school base.
WAYNE McCURRIE: No, look, it’s a very, very profitable business model. But you’ve just got to evaluate this as to whether the share hasn’t done too well. It’s a small company but it has been a real success story as far as the share price in concerned.
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