Private education group ADvTECH’s schools division continues to weigh on earnings, partly due to fraud uncovered within the division and lower enrolments.
The group reported a 3% decline in diluted headline earnings per share to 69.1 cents in the year ended December 31 2017, down from 71 cents previously after taking a R35.5 million hit in profit after tax due to fraud committed by a financial manager in the schools division over a three year period from 2015. Diluted normalised headline earnings per share, which exclude the impact of the fraud, rose 20% to 75.6 cents.
The fraud, which amounted to R48.1 million, resulted in an overstatement of revenue, an understatement of costs and the theft of cash. The cash component amounted to R5 million, of which R2 million has been ring fenced is likely to be secured as the group proceeds with criminal charges against the former employee, said chief executive Roy Douglas.
ADvTECH has corrected its financial results reported from 2015 onwards to reflect the impact of the fraudulent activities.
Corrections due to fraud
Fraud aside, the schools divison was also impacted by “muted” growth in student numbers. Total enrolments rose by 3%, well below the 10% growth rate reported in 2016, to 27 408 learners. The worrying first half trend of enrolments at its premium brands – which include the likes of Crawford Schools, Abbots College and Trinity House – being affected by financial pressures on families as well as emigration and “semigration” continued into the second half. Douglas explained that enrolments at natural entry points, such as grades 0 and 1 in primary school and grade 8 in high school, were in line with expectations while replacing learners at non-natural entry points proved difficult.
He added that group is prioritising investments into mid-fee schools in a bid to retain learners forced to leave premium brands due financial pressures and that it is also working to improve its presence in the Western Cape in order to capitalise on semingration.
Overall, the schools division reported a 14% increase in revenue to R1.87 billion. However, its operating profit fell by 13% to R299 million.
According to Vunani Securities’ Anthony Clark, the pressure experienced by the schools unit is due to ADvTECH’s conscious decision to mitigate price increases, which affect its ability to recover costs and natural attrition margins. ADvTECH’s fee increases are set at around 6-7% per annum compared to rival Curro, which increases fees by around 10-12% every year.
“ADvTECH’s schools and fees are at the top end of the system so they are far more exposed to pressures at the upper end. If they cut fees, they will cut their own throats…But low fee increases will come back to bite. When the economy turns and they want to turn lifts, parents (used to 6-7% increases) will scream blue murder. It is going to be incredibly hard to play catch-up.”
Douglas explained that it increases prices by around two points higher than consumer price inflation (CPI) as it believes responsible pricing is important. He said the group would recover costs by improving efficiencies through various means such as its attempt to move from a decentralised administrative system to a centralised system, and that teachers would continue to get increases. The group has not disclosed the costs associated with centralising the schools system although it is expected to take effect over 18 months to 36 months and deliver savings of around 10%.
ADvTECH’s tertiary business – comprising Varsity College, Rosebank College, Vega, Capsicum Culinary Studio and the Private Hotel School, among others – saw revenue and operating profit increase by 26% to R1.58 billion and by 44% to R321 million respectively.
Douglas said government’s recent commitment to free education would provide a level of noise and disruption to the tertiary education sector but questions as to whether an public education system, already at capacity and affected by a lack infrastructure, would be able to deliver remain. According to Clark, the group’s tertiary institutions are unlikely to be affected as government aims to assist students with a household income of R350 000 or less, which would disqualify students at ADvTECH’s private institutions.
Clark, who has followed ADvTECH for 16 years, said the group’s results were very much like those reported over the last two to three years, whereby growth is driven purely by the tertiary unit while the schools division continued to produce lacklustre results.
“In light of the Stadio listing, why is chief executive Roy Douglas considering spinning off a portion of the tertiary business to add value to the company?” he asked.
ADvTECH upped its dividend by 4.5% to 34 cents per share, from 32.5 cents previously.