AdvTech was the last of the listed private education companies to report its 2022 financial year earnings.
The sector had high hopes as both its rivals — private schools business Curro and tertiary education specialist Stadio — delivered sparkling results.
AdvTech did deliver another excellent set of results, with headline earnings increasing 20% and a 37c final dividend paid, taking the total for the year to 60c a share.
On results, the AdvTech share price drifted modestly lower as a disclosure of a payment issue within the tertiary division caught the market by surprise. But as management undertook its institutional and analyst update roadshow, the stock rallied a bit in the seven days after the results.
For some years, AdvTech has invested heavily in centralised systems to reduced the overlap and duplication of administrative, billing and marketing costs. That evolutionary process has saved costs across the board, with more to come from centralised procurement and services.
But in the reporting period, mainly in the second half, the tertiary division’s billing system went awry as the migration of data caused billing to go out late. That caused debtors to blow out to R446.9m. AdvTech admitted the issue was an “own goal”. Since year-end, R205m of the outstanding sum has been collected and the company is confident of collecting the balance despite a provision being made.
Aside from the tertiary “fly in the ointment”, the overall business performed well, with a robust set of numbers from schooling, a continued sterling performance from resourcing (that again shot the lights out), and a fair period from tertiary.
There was growth across the entire brand offering in schooling and tertiary. The repositioning of the price points within AdvTech years ago has led to a reinvigoration — especially in the midprice brands such as AdvTech Academy and Pinnacle in schooling and Rosebank College in tertiary.
The push into the rest of Africa through taking Crawford into Kenya has been successful, with faster growth and higher margins attained. In the 2022 results, domestic schools reported a 17% rise in operating profit to R484m, with the rest of Africa ahead 69% to R80m.
The real scene stealer, however, has been the resourcing division. For many years, it was seen as the spare child in AdvTech, with calls for the assets to be sold to focus on the company’s education core.
Repositioning the division to offer skilled personnel within Africa in key areas such as oil and gas, technology and finance has powered the unit. The South African resourcing sector is stagnated and competitive, but in the rest of Africa, the sector is still untapped, and AdvTech has successfully filled the gap. For the year, operating profit rose 151% to R82m vs a modest 7% rise domestically to R6.4m.
IM foresees the division attracting the interest of a global player who wants African resourcing capacity. AdvTech would be the plum choice and a deal may be done to enhance shareholder value in due course.
The private education sector has tailwinds. Macro issues in the public sector have resulted in the state battling to provide quality education — despite generous budgetary allocations from the National Treasury. The growing demand from rising student numbers cannot be met as the number of government schools has declined.
No new investment has been made in the government’s tertiary system, so it can’t keep up with demand. This has led to growth in the private education sector as those who can pay for it seek an alternative for their children. IM believes this will continue as the government fails to deliver quality broad-based education.
As IM wrote in a special education feature in September 2022, we recommend Stadio as our long-term play in private education given its asset-light nature. We like the tertiary sector’s growth trajectory — especially in the online space.
Curro is our preferred pure schooling play — but our call has yet to be successful, with Curro down 13% in the past six months. Stadio has rallied 8%.
AdvTech in the same period is up 3.7%, a middle-of-the-road performance for the sector. The stock is highly cash generative and has a conservative balance sheet, with further benefits ahead from centralised cost control. The business has been successfully repositioned, especially in schooling, with resourcing and tertiary performing commendably.
The JSE mid-cap market has been under some strain. That may hold back the sector’s valuation. For conservative investors wanting a mature, best-of-both-worlds education play, IM places a hold on AdvTech at about R18, with a target of R20.70.
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