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Restructuring of tertiary brands pays off for ADvTECH

CEO Roy Douglas says company looking to improving its schools business, after the number of leavers increases.

NASTASSIA ARENDSE:  Private education group ADvTECH reported a 3% fall in earnings as a result of lower student intake and a financial hit from an accounting fraud that was uncovered last year.

This is Roy Douglas, the CEO of ADvTECH

ROY DOUGLAS:  We are very pleased with the result. I think it shows the strength and the resilience of the group, even in the tough economic environment, with revenue up 22% and our trading operating profit up 3% on a normalised basis. There are some our tertiary businesses that did extremely well, growing revenue by 26% and profit by 44%. And our resourcing division also, in a particularly tough climate, put in an excellent result – mostly an endorsement of the management strategy to seek new markets and product offerings in recognition of the fact that the South African economy and market would be a very tough place, so I think overall from that perspective very pleasing.

Our schools business was a little more muted, 14% revenue growth and nearly 3% operating profit growth, but we have made a number of investments in the development of capacity, and it takes a while for that to come on stream. And we’ve no doubt that we have seen some tough circumstances for consumers with the economic conditions hurting them, and we’ve had a number of leavers. So our underlying enrolment in the schools business has been good, but we have actually had an increase in the number of leavers primarily for financial reasons, and secondly emigration and semigration, which we did cover at half-year and expanded upon the effect that has on the business.

NASTASSIA ARENDSE:  Last year when we spoke we were dealing with news from your side that there was some kind of fraud relating to the 2015/16 results, if I’m not mistaken. Has that been accounted for?

ROY DOUGLAS:  Yes, that’s quite correct. In fact, we did announce the impact of a fraud. The total value of that is R48.1 million, R35.5 million after tax. But it was perpetrated over a three-year period – 2015, 2016 and in 2017. Ironically we uncovered the unfortunate practice as a result of changes that we were bringing about in the schools business, particularly on the financial reporting and process matters and stuff. That was disappointing for us. But it has been fully accounted for in the 2017 financial year. So the results we are talking about are the normalised trading results.

Read: ADvTECH earnings hit by R48m fraud loss

NASTASSIA ARENDSE:  On the schools division side you mention that ‘enrolments at some of our premium bands are particularly impacted due to financial pressures on some families and the effects of emigration and semigration’. From where you stand, is there anything you can control or that at this point is out of your hands with regard to what’s happening in the schools division?

ROY DOUGLAS:  Certainly. I think the problem is that we can adopt different strategies. The point is they are probably uncontrollable in the short term, but we can definitely adopt strategies that help us to manage it for the medium to longer term.

As a perfect example, a number of people in our premium brands have felt financial pressures and, had we had a broader representation, saying that the tech academies literally connect to schools which are performing extremely well, had we had more of those offerings we might have been able to negate some of the impact by offering parents the opportunity perhaps of moving to other schools within the group.

Likewise with the semigration. Obviously there is not much we can do about emigration of families who decide to leave the country completely. But again, our representation in the Western Cape, which is the chief benefactor of this semigration trend in South Africa, is relatively low, and again it’s not something we can do much with in the short term. But certainty in the medium term we hope to increase our presence in the Western Cape, have a more balanced portfolio. I think you’ll see in these results we announced there has been a lot of activity on that specific issue. We bought Elkanah, Glenwood House and Greenwood Bay, all of which are in the Western Cape. That’s part and parcel of our strategy – to try and improve our presence in that market sector.

So probably short term a little beyond our control. In the medium to longer term there are certainly things that we believe we might be able to put into place that would allow for mitigating strategies.

NASTASSIA ARENDSE:  Your tertiary division did very well. What do you believe you are doing right on that front?

ROY DOUGLAS:  You might recall that a few years back we spent some time restructuring and repositioning our tertiary brands and I think the work that we did there is obviously paying dividends for us now. The businesses are very well focused on their respective target markets, their operating structures are efficient in the sectors, and their consumer value propositions are well understood and clearly communicated. That’s delivered really good results for us. We are pleased after seeing that performance.

So we are working in our schools business, which of course has grown dramatically over the last few years with a number of acquisitions. What that means is we’ve got a plethora of legacies and structures within the business that we are obviously dealing with, and we are creating very clearly focused brand groups and brand teams to concentrate on the market offering and market proposition. And then we are supporting that with the integration of back-office finance and admin functions, so that we are consolidate or transaction processing, look at unitary information systems which will reduce a lot of the complexity, and we expect that that will deliver handsome benefits for us even in future.

The schools business for many years was the stalwart of ADvTECH. The tertiary business is performing extremely well at the moment and with the work that we are doing on our tertiary business we think we’ll have a very well-structured and balanced business going forward and be well able to take advantage of the demand that we see continuing, both here in South Africa and also of course in Africa.

NASTASSIA ARENDSE:  You’ll be opening your first Crawford International School in Nairobi. Tell me about that.

ROY DOUGLAS:  Ja, that is very exciting for us. I’m not sure if you’ve ever had the opportunity to go to Nairobi. One of the unavoidable features is that it’s a very heavily congested city. The traffic problem is well recorded, it’s typical of most countries that have seen pretty impressive economic growth, and infrastructure is failing to keep up with that. As a result, Rendeavour, who are property developer throughout Africa, have developed a very exciting proposition called Tatu City, very similar to satellite developments of Century City, Midrand, what you see happening in major metropolitan areas everywhere. It’s to free up the congestion and infrastructure block that happens when an area develops rapidly. Now it’s an opportunity for us to take Crawford International into Kenya, into an area at Tatu City, which is, as I say, a satellite development just outside of Nairobi, and we have no doubt that will be an enormous success, an area to fee up the congestion and movement of goods and services and Crawford will be very well positioned.

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