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AdvTech shares ride the retail elevator down

Despite its commendable set of interim results.

Education provider AdvTech’s share price is down since April 2018 despite a fairly decent set of financials for the half year to June. Private schooling competitor Curro’s share price is down about 60% over the same period. Stadio, the tertiary college portfolio unbundled from Curro in 2017, has seen its share price drop by two thirds since April 2018. All three are listed under general retailers, which is down 40% over the last year.

The financial results from Curro and AdvTech don’t seem to justify a walloping of that size, so what’s going on here?

“I think it is general sentiment around the retail sector,” says AdvTech CEO Roy Douglas. “If you look at our competitors such as Curro and Stadio, their share prices are also down significantly.”

Parents under pressure

Education has traditionally been seen as a defensive investment, as removing a child from school is often the last decision parents under financial stress will make. Douglas says the company will assist parents in financial difficulty, and this helps with student retention. “There is no doubt these are difficult times for many parents and we try as far as possible to come to arrangements with those in need. This has helped our student retentions.”

AdvTech’s just-announced results for the six months to June 2019 show revenue up 15% to R2.5 billion and operating profit up 6% to R428 million. Cash generation from operations is impressive and has been growing at a 27% annual clip for the last four years.

Source: AdvTech

The 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 – notably Botswana and Kenya – has been impressive and opens up exciting future possibilities. The portfolio also includes the University of Africa in Zambia, which offers distance learning programmes up to PhD level.

AdvTech is the leading provider in the premium private school sector where demand is strong. “However, the challenging South African socio-economic climate continues and our focus is to ensure that our brands offer value to our customers and we are investing in enhancing our academic offering, improving our focus on customers and driving operational efficiencies,” says its interim results announcement.

New schools

Two Pinnacle schools in the mid-fee sector have been repositioned, while the opening of Pinnacle colleges in Waterfall and Linden in Gauteng next year will boost AdvTech’s presence in this sector to 24 schools across nine campuses nationally.

Earlier this year its subsidiary Independent Institute of Education (IIE) acquired Monash South Africa, offering university-level education and boosting its tertiary student complement to more than 43 000. The tertiary division is showing good growth and is now the largest private university in SA.

This division grew both revenue and operating profit by 20% to R1 billion and R245 million respectively. IIE now offers 220 courses and plans are in place to open two new Rosebank College Campuses in Cape Town and Port Elizabeth in 2020, while expanding at several Varsity College campuses to meet growing demand.

Recruitment less robust

On the recruitment side of the business, the news is less encouraging: placement volumes and operating profits declined, with the country experiencing reduced employer confidence and the highest levels of unemployment in about 15 years.

The key numbers are:

  • Revenue up 15%% to R2.5 billion
  • Normalised earnings per share increased 7% to 42.5 cents
  • School student numbers increased 11%
  • Improved debtors book, with fees in advance and deposits up 19%
  • Capital commitments amount to R1.4 billion and will largely be funded by way of debt
  • Interim dividend of 15c has been declared for the half year to June 2019.

In an otherwise bleak economic environment, a ray of sunshine broke through the clouds this week with finance minister Tito Mboweni’s plan to reboot the economy.

“The growth plan is encouraging, and highlights a number of areas of opportunity,” says Douglas. “It challenges the status quo and shows that a considerable amount of thought has gone into how to get SA on the growth path again.

“We’ve had lots of plans and documents in the past, but they all suffered from poor execution and delivery. This is where we now need to put our attention.”

AdvTech

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One for widows and orphans, and the risk averse. I would rather put my pennies on Stadio – and Curro if it drops further.

The PE ratios and expectations for Curro and Stadio were very high (and still are), with political correctness to project learner numbers on the population as a whole, whilst the true economic valuable and sustainable population is much, much smaller. It has reached the flattening of the line much earlier than the unrealistic view of the market size.

Education business is a simple pupil numbers game; and the skill to find the sweet spot between profitability of fees and customer tolerance and perception of affordability and value. The PE ratios implied that the growth in pupil numbers would simply have keep on rocketing while fees could keep on creeping up. The growth limit was however not based on the businesslike reality of population that matters economically for institutions like private schooling.

End of comments.

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