AdvTech shares have been on an extraordinary roller coaster ride since peaking at close to R21 in March 2017. After the hard lockdown was announced in March 2020, the shares dropped to around R6 before commencing their climb to nearly R17 this week.
The share price decline between 2017 and 2019 was in large part due to investors falling out of love with retail stocks generally. Clearly, that’s no longer the case.
Interim results for the six months to June 2021 released on Tuesday (August 31) explain the renewed enthusiasm for AdvTech shares.
The group is primarily focused on education and recruitment.
SA recruitment has been withering on the vine for years due to a weak economy and the flight of skills abroad, so it says something about AdvTech management that it was able to pull a few rabbits out of the hat and return its SA division to profitability.
It managed to increase its share of a declining South African market while expanding aggressively in Africa by offering contracting and payroll services to large organisations. The margins are thin on this business, but IFRS (International Financial Reporting Standards) requires it to account for this revenue on its income statement. Underlying volumes in the placements divisions increased in both SA and the rest of Africa, with operating profit increasing to R16 million (2020: R3 million).
At the group level, operating profit was up 16% to R514 million (2020: R445 million) with group operating margins up to 18% (2020: 15.7%). Group revenue grew by 1% to R2.9 billion (2020: R2.8 billion).
Normalised earnings for the period increased by 31% to R297 million (2020: R226 million) while normalised earnings per share increased by 31% to 54.6 cents (2020: 41.8 cents) per share.
The schools portfolio includes Crawford Schools, Pinnacle, Trinityhouse and several smaller school brands, as well as a number of tertiary education institutions such as Monash, Varsity College, Rosebank College, Vega and six Capsicum chef schools.
Growth in the African school market, principally in Kenya and Botswana, has been one of the standout stories driving AdvTech in recent years. School enrolments were up 6% for the year to June 2021, and were up 5% for the group’s tertiary institutions.
“In Africa, there is strong demand for quality education among the growing middle class, and we have been major beneficiaries of that trend,” says CEO Roy Douglas.
“In SA we have also been seeing an increase in new enrolments, but this is largely due to falling trust in public sector education.”
The group’s prior investment in IT and online delivery methods meant it was well placed to respond to the Covid lockdowns, and is now able to offer a blended model of face-to-face tuition alongside online delivery.
In SA, the mid-fee education sector continues to show good enrolment growth. A new online offering called Evolve Online School was launched, with 460 students enrolled in its first year of operation. The repositioning of Abbotts College at a lower price point has been well received by the market with enrolments growing by 15%. The premium brands in the AdvTech portfolio managed to maintain student numbers despite more students than usual leaving or being excluded for financial reasons.
Revenue in the SA schools division was up 1% to R1.09 billion (2020: R1.07 billion), and operating profit increased by 2% to R202 million (2020: R199 million).
Crawford International in Kenya is now generating positive cash flow after the initial investment, while Makini is making a strong recovery following the setback in 2020 where, due to a government directive, it was unable to deliver the curriculum for a large part of the year and consequently not able to charge students. One of the mitigating actions taken by the school was the introduction of the Cambridge International Curriculum to allow those students who chose to, to continue with their schooling.
Revenue in the rest of Africa increased 11% to R120 million (2020: R108 million) with an operating profit of R16 million (2020: loss of R9 million). The operating margin of 13.5% is expected to widen as Crawford increases its capacity in the coming trading period.
The tertiary division’s trading period was disrupted by the delayed release of matric results. However, it still managed to increased revenue by 3% R1.22 billion (2020: R1.19 billion), with new enrolments coming primarily from Rosebank College.
The resources division reported a 6% decline in revenue due to a change in the nature of contracts signed with client companies, coupled with the translation effects of a stronger rand. Underlying volumes have increased in both SA and the rest of Africa. Operating profit increased to R16 million (2020: R3 million).
AdvTech learned some valuable lessons during the Covid lockdowns, says Douglas, including an ability to respond at speed at changing circumstances, cost containment and a fleet-footed management style capable of capitalising on opportunities as they arise.
- 16% growth in operating profit
- 69% increase in earnings per share (after a 24% decline in the corresponding 2020 reporting period)
- 37% increase in headline earnings per share
- 12% improvement in cash generated by operating activities, and
- 19c per share interim dividend (2020: no dividend).