Listed education company Pembury Lifestyle Group appears to be on the brink of insolvency, an assertion its management flatly denies.
The JSE’s private education stalwarts AdvTech and Curro Holdings have been star performers on the JSE in recent years — but newcomer Pembury is clearly not in the same class.
Pembury will need to pull up its socks rather sharply to avoid failing. Its just-released interim results to end-June have prompted a cautionary report from auditors Nexia SAB&T — who drew attention to a "material uncertainty" that might cast significant doubt on the group’s ability to continue as a going concern.
The auditors highlighted accumulated losses of almost R100m with Pembury hopelessly failing the acid test as its current liabilities exceeded its assets by R55.8m.
This is a dismal showing from a group that showed rapid profit growth from its fledgling affordable schools business when it listed in early 2017 at a price of 97c.
The market meted out harsh punishment after the release of its results, and at the time of writing its share price had dribbled down to just 6c.
This gives Pembury a market capitalisation of less than R25m.
Pembury has already been forced to make an abrupt about-turn on its foray into retirement villages, and these underperforming assets are now being sold off.
The group is also dealing with a litany of legal issues, including litigation with service providers like Artificial Grass SA and Waco Africa.
To top it all, the auditors also raised a reportable irregularity, disclosing that some of Pembury’s independent schools were not registered with the provincial education authorities as required by the SA Schools Act.
Bizarrely, CEO Andrew McLachlan says Pembury remains highly solvent and is steadily addressing the tight cash-flow constraints, "which are improving each month through actions taken by management".
McLachlan says management is engaging with potential investors and financial institutions to provide secured property finance to extinguish current liabilities and replace them with long-term debt. He says this would ease Pembury’s monthly operational cash flow and ensure it has sustainably operating school campuses from the 2020 financial year onwards.
McLachlan says most of the interim loss of R22m stemmed from a discontinued operation. The core schools business is in the black — but revenue of R55m was whittled down to a pretax profit of just R8m.
This represents a margin of less than 15%, well below that achieved by Curro and AdvTech’s schools division.
Expansion plans
He also argues that a large portion of the current liabilities relate to provisions raised at the end of December last year or the current portion of long-term liabilities. He adds that the current assets "may only reflect one months of receivables (sic)".
Despite the signs of balance-sheet strain, Pembury still has its sights set on expanding its school footprint. McLachlan indicated the group would consider acquiring smaller existing private schools that show growth potential — albeit on a conservative basis.
Interestingly, Pembury has opted to close its Allens View and Midview campuses (both in Gauteng) at the end of the 2019 financial year due to "poor long-term growth prospects in the area and concerns around the sustainability of the two campuses".
But long before acquisitions can be contemplated, Pembury will need to urgently sort out its liquidity crunch.
McLachlan says management recognises the need to obtain additional funding for operations during the next 12 months.
He says negotiations with two funding institutions are well advanced — one for bond finance and the other for structured finance. Perhaps more critical is McLachlan’s confirmation that Pembury is still engaging with interested investors to secure a long-term equity partner.
Negotiations can’t be easy, with potential equity partners no doubt cognisant of Pembury’s desperate financial situation and litany of legal woes.
In the meantime, Pembury directors also have to cope with potential boardroom ructions.
An unidentified shareholder — holding at least 10% of Pembury’s voting rights — has called a general meeting with a view to reconstituting the board of directors.
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