The tertiary unit of independent education group ADvTECH, its standout performer, was more profitable than that of rival company Curro Holdings’ entire business during the first six months of 2017.
ADvTECH’s tertiary division reported a 56% increase in operating profit to R157 million for the six months ended June 2017. Rival education group Curro last week reported a 31% increase in profit after tax to R105 million over the same period, as it prepared to list its own tertiary unit Stadio.
Anthony Clark, a small- and medium-cap market analyst at Vunani Securities cautions against comparing the two, saying that ADvTECH’s tertiary unit has been operation for many, many years while Curro has only been listed for six years and is still feeling the effects of the J curve.
But, he said an “exceptional performance” by ADvTECH’s tertiary unit did well to offset a “pedestrian” performance by the group’s school division.
ADvTECH’s tertiary unit – comprising Varsity College, Rosebank College, Vega, Capsicum Culinary Studio and the Private Hotel School, among others – saw revenue increase 33% to R789 million, while its operating margin increased from 17% to 20%.
Vestact’s Bright Khumalo attributed the performance of its tertiary unit to a strong, diverse set of brands. “Tourism and hospitality are quite popular. Most of the good schools, which offer these courses, are ADvTECH brands. As long as the rand is weak, the tourism sector will do well and ADvTECH stands to benefit.”
He went on to say that the group could also be benefitting from instability at public institutions, caused by the fees must fall protests. “Parents are willing to pay a premium price at private institutions for no disturbances and to know that their kids will complete their three-year degrees in three years,” he said, adding that there is little to no difference between some degrees on offer at the likes of Varsity College and public universities.
On the other hand, the group’s schools division appears to be succumbing to macroeconomic and socio-political pressures. Its revenue increased by 10% to R904 million but operating profit ticked up just 5% to R172 million, as net student numbers decreased.
“The difficult economic climate and unsettled socio-political environment had a more significant effect on school enrolment numbers than had been anticipated. We have seen a consistent rise in the number of families emigrating and this trend had a particularly negative effect on enrolled numbers as we lose students in grades where it is difficult to replace. In addition, we have seen withdrawals and exclusions as a result of financial pressures,” said chief executive Roy Douglas.
He told Moneyweb that the primary reason for students leaving ADvTECH schools differed across its brands, with some brands reporting that emigration related losses were as high as 43% of the total number of withdrawals. ADvTECH’s brands – which include Crawford Schools, Abbotts College and Trinityhouse – are by and large exposed to the upper end of the market.
Curro, reported a surprise 6% decline in learner numbers to 9602 across its seven Meridian Schools, which are exposed to the rural lower-fee market.
According to Clark, the performance of both ADvTECH and Curro’s schools’ units are telling. “Curro seems to be affected by attrition at the low end and ADvTECH is suffering due to net migration and financial pressures at the higher-end. ADvTECH has a much higher blend of premium school and this shows the stress on that market, if not all LSMs in the country. The economy is really taking strain and the average family on the ground, is struggling.”
He said the consistent slip in business margins – down for the third consecutive reporting period – are of concern due to the large investments and capex spend in the business. He added that the margin slip may be related to ADvTECH’s decision not to increase school fees at “juicy” levels – education inflation is around 8% annually – as it did not want to push prices up to the extent that it would harm its base.
Khumalo said the margin slip was to be expected as the group continues to diversify throughout the independent schools spectrum by investing in less premium schools – “which drag the performance down in terms of margins” – in a bid to compete directly with Curro.
At group level, ADvTECH reported a 22% increase in revenue to R2 billion and a 28% increase in operating profit to R344 million while headline earnings per share rose 6% to 38.6 cents. It declared an interim dividend of 15 cents per share.
Clark said the group’s interim performance was solid and shows that it is on track to deliver 100 cents in earnings by 2018. The target, announced shortly after the group had rebuffed a takeover by Curro, was considered bold at the time. But its interim earnings per share number of 39.1 cents, up 23% year-on-year, appears supportive.
Clark, who is bullish on Curro, said ADvTECH’s current rating and cash generative nature make it more attractive at this point in time.
Khumalo said Vestact is in favour of ADvTECH due to its diversified brand portfolio and is aggressively buying shares in the company for its clients. At a P/E of around 21, ADvTECH is a bargain relative to Curro, which is trading at a P/E of 99, he said.