Rating the education scorecard

BUY: STADIO HOLDINGS

Share price: 310c

JSE code: SDO

Stadio Holdings is the tertiary education spin-off from Curro Holdings and is spearheaded by Curro founder and ex-CEO Chris van der Merwe.

Stadio has ambitions for a campus-light, asset-lighter offering with a strong focus on distance learning. Punting a "multiversity" offering (including short-term plans for campuses in Cape Town and Johannesburg), the company hopes to have 100,000 students by 2026. It already has more than 35,000, and offers some 180 registered qualifications.

The stock is expensive on an earnings multiple of 40 times. However, it will need only 40% of the capital expenditure that Curro needed to attain similarly ambitious growth. It plans to spend R1bn on buying out the minority of subsidiary SBS and building the two new campuses (with Durban set to follow).

Stadio’s earnings have exceeded prospectus and IM is confident it will outperform for the next 12 to 18 months. Then it will hit the same issues as all education stocks — rising debt. Stadio has net cash, no gearing and can easily fund expansion. But rising finance costs will affect earnings from late 2020 into 2021. Still, Stadio will have a faster growth spurt and swifter J-curve than most of its listed competitors. That growth buffer — coupled with expansion prospects — will keep momentum strong.

HOLD: CURRO HOLDINGS

Share price: R24.15

JSE code: COH

Once the sector upstart, Curro has 55,000 pupils in its mostly low-to mid-fee schools offering that now has a national footprint. Rapid growth was initially funded by rights issues — but Curro is gearing its balance sheet for hefty expansion that will test its management as well as its balance sheet.

Curro plans 34 new high schools and 15 "new-build schools" over the next two years at a cost of R2bn, funded from debt. The new high schools are needed to accommodate pupils from Curro’s primary schools. The rapid add-on of high schools now needed will cost — but high school pupils tend to ensure better business margins.

For now Curro’s balance sheet can cope. Earnings (and dividend) growth will be slightly lower than the market expected as funds are directed towards capital expenditure and servicing debt. The earnings J-curve return will only start to kick in after the new school premises are bedded down, which means Curro’s earnings targets have been pushed out to 2022/2023.

Curro is already on a high earnings multiple of 40 times, and IM is not expecting material share price appreciation due to the costs of the expansion thrust. IM sees an impasse in sentiment until the market digests the expansion and growth update.

SELL: ADVTECH

Share price: R13.60

JSE code: ADH

AdvTech is the doyen of the JSE’s private education sector. But its corporate conservatism, higher fee price pointers and — dare we say — complacency, planted the seeds of its current predicament.

AdvTech’s high-fee structure and staid performance allowed an interloper, Curro, to snatch a huge chunk of the market. In 2015 AdvTech went on a massive school-buying spree, piling up debt just as the economy was starting to slow.

Lately its high-fee schools have seen low revenue and even lower earnings growth. In 2019 school-fee increases were low and half of schools passed on no increases all. While prudent, this will lead to margin squeeze. What’s more, the long-planned central costing initiative to trim overall running costs is behind schedule.

Fortunately, the tertiary segment has performed superbly in recent years, but it is now beginning to slow. New, expensive capacity is needed. It seems likely tertiary’s 20% earnings growth will start to slow, with R2bn needed for new campuses. AdvTech is already debt heavy, but can afford to expand. Still, the cost will be high, leading to slower earnings growth and lower dividends. Despite it being the cheapest stock in the sector on an earnings multiple basis, IM can’t see much to propel AdvTech’s price in the foreseeable future.-