Curro just released its interim results for the half year to June 2019 and the figures tell a story of a company that has prospered at the expense of an overburdened public education system.
Not all public schools are terrible. Several rank among the best in terms of matric pass rates, and the better resourced public schools are able to match the academic achievements of the private sector. But Curro and other independent schools are clearly filling a gaping hole left by an overstretched and under-resourced public sector.
Figures from South African Market Insights show there are just short of 2 000 independent schools in SA with slightly more than 400 000 students. Put another way, about 8% of schools in SA are independent, accommodating 3% of the student population. The public sector has about 23 800 schools with 12.5 million students. This means the public sector is carrying a huge burden, with nearly three times as many students per teacher as in the private sector.
Since 2014, Curro has grown its number of campuses from 31 to 68 and schools from 79 to 164. It has more than doubled the number of students to 57 173 over the same period, a compound growth rate of 16% a year. Not all of this growth has been from the building of new schools. It has embarked on a programme of acquiring existing schools, which can be bought at a fraction of their replacement value, and applying its proven formula of ‘add water and mix’ to get these schools to the desired rate of profitability.
Curro has ventured into poorer ‘township’ markets and appears to be making a success of this.
Its mix of schools caters for budgets from R1 900 a student per month to R10 000 a month at the top end. That is still well short of the nearly R300 000 a year you would pay to put your child through one of the top boarding schools, such as Hilton or Michaelhouse. Businesstech put together a useful series of tables to show what kind of value these top schools offer in terms of academic achievements.
One way to retain students within the Curro ecosystem up to Grade 12 is to build extra capacity in existing schools to accommodate increased student numbers at the higher grade levels. Student fall-out rates are also contained by making it financially softer on the parents and by placing students who relocate to other parts of the country in a different Curro school. The success of this strategy is evident in the drop in school leavers (excluding those who finish school at Grade 12) from 21.4% to 18% over the year to December 2018.
Investing in learner retention
Speaking yesterday at the half year results presentation, Curro CEO Andries Greyling said rather than lose students whose parents had run into financial difficulty, softer financial plans are being put in place to improve student retention. This has resulted in bad debts as a percentage of revenue increasing from 0.6% to 0.8% since 2016, but the group has been able to recover 80% of bad debts within five months of year end. Some 60% of bad debts written off are eventually recovered.
One concern is the sharp rise in debt since 2015: to R3.5 billion in 2019 from about R1.5 billion in 2015. Greyling says the group’s generous earnings margin and robust cash flows are comfortably able to service this debt. The cash flow statement shows a near doubling in finance costs to R109 million over the last six months, but this is easily covered by cash generated from operations, and the group intends maintaining an interest cover rate of about three times.
“If we look at the growth in interest, it is high, but would we do it again – yes,” said Greyling.
“The growth in our Ebitda [earning before interest, taxes, depreciation and amortisation] will easily cover this [higher interest expense].”
It was important to increase capex in schools to increase capacity at the higher grades and improve student retention through the school life cycle, added Greyling. The real earnings benefit will come as student numbers increase at the higher grades. Having expended the necessary capex to build capacity, Curro will then be able to grow revenue by building up its student numbers at the higher grades without significant increases in operating costs.
The key numbers are:
- Group Ebitda increased by 21% from R342 million to R415 million
- Schools’ Ebitda increased by 20% from R409 million to R491 million
- Headline earnings per share increased by 44% from 34.8 cents to 50 cents
- Learner numbers are up by an above-average 13% from 50 691 to 57 173
- Revenue increased 19% to R1.48 billion
- Operating expenses increased 19% to R1 billion.
Going forward, the group expects to build just five new schools in 2020 and increase its focus on building capacity at its existing schools.