For the past three years IM has written an annual special feature on the private education sector.
The three main JSE-listed stocks in this field are AdvTech (market cap R11.8bn), Curro Holdings (market cap R5.9bn) and Stadio Holdings (market cap R4.7bn). Curro is a pure private primary and secondary schools business; Stadio is a tertiary education business with a significant online learning division; and AdvTech is a blend, combining schooling and tertiary with an African education offshoot.
AdvTech is the largest and most mature player of the three, having listed on the JSE in 1987. The company operates 26 brands in total over 18 education brands, encompassing more than 152 education, training and recruitment sites mostly in South Africa but with campuses also in Botswana and Kenya. It has 88,631 students in its schools and tertiary offerings. Among its education brands are Crawford College, Trinityhouse, Varsity College and Rosebank College.
Curro was founded in 1997. Then came a 50% acquisition by PSG Group, which drove its growth and expansion. Curro listed on the JSE in 2011 and has expanded to have a nationwide primary and secondary schools footprint of 76 campuses, 182 schools and 72,385 pupils.
In 2017 the company decided to spin off its tertiary education division into a separate listing, Stadio. The business has grown fast and most of its students are on an online platform though the company has campuses in Gauteng and Cape Town for contact learners. Its brands include Milpark, Afda, Embury and Southern Business School.
Unlike Curro, which has spent R15bn to establish its footprint on maturity — this is mostly equity and debt funded — Stadio is asset-light and has self-funded its growth model. IM does not forecast any equity funding scenario.
All three counters reported organic growth in the number of pupils, ranging from 3%-9%
Looking back over the previous three years of IM sector recommendations, IM believes giving itself a B+ report card would be a fair reflection.
In April 2020, IM recommended Stadio as its top pick at 112c. In February 2021 IM selected AdvTech at R11.35 and in September 2022, Stadio was again IM’s preferred sector play at 362c.
We were too early with choosing Curro as our top pick at 927c in 2022; however, we did warn that “if you had to own only one share in the private education sector for the long term, our choice would be Stadio”.
At the time of writing, AdvTech is trading at R21.40, Curro at R10 and Stadio at 540c. Our faith in Stadio in 2020 and 2022 has been well rewarded, as has our 2021 selection of AdvTech. Curro has only recently started to come right after a prolonged period of sector underperformance. IM believes Curro has turned a corner, having posted two consecutive growth periods in earnings.
After a period of market lethargy towards the sector, enthusiasm for private education was only reignited recently, after the AGMs from all three listed counters indicated they were operating at a far more robust and profitable level than the market was envisioning. The sector started to rally.
The market had been concerned that the weakness in the underlying economy and the stretched nature of consumers’ finances would lead to weakness in private education sector demand. That was dispelled by the AGMs’ feedback and reinforced by the sterling interim results to June, as reported by all three counters.
It is clear that as the state education system continues to buckle and take strain with scant resources, many more parents are deciding to educate their children privately. All three counters reported organic growth in the number of pupils, ranging from 3%-9%, with fee increases of up to 14% being accepted by the market.
It is clear from results seen in FY2022 and H1 2023 that private education has become, to many parents, a necessity rather than a luxury.
With the sector having had a negative performance since the start of 2023, the AGM season in May and June shone a fresh spotlight on all three counters. Year to date, as IM writes, AdvTech is up 17%, Curro up 11% and Stadio up 16% against a -0.1% dip in the JSE small cap index and a -4.9% loss from the JSE mid-cap index. Overall, the sector gets a gold star for market performance.
The first interim results for 2023 were from Curro, on August 21. It was once the private education sector darling, with a market capitalisation at its peak of R20bn in 2015. That zenith was followed by several years of lacklustre earnings that disappointed the market. Ever-demanding equity raises necessitated a sixth cash call in August 2020, to raise R1.5bn at a subscription price of 807c to settle burgeoning debt levels. The market balked at this last rights issue, with 14.6% of the issue left with the underwriter, PSG.
From its 2015 peak, Curro’s stratospheric p:e rating deflated as the market worried that its rapid expansion was failing to deliver the requisite earnings to justify the valuation. The weak corporate performance jaundiced the share price and this was exacerbated when PSG Group unbundled its 64% stake in Curro in 2022, leading to material stock digestion.
Curro only started to recover after its FY2022 year-end results, when the counter reported headline earnings per share (HEPS) rising 50.1% to 61.4c and a dividend of 11.08c. This positive result was followed recently by H1 2023 earnings, with HEPS rising 26% to 34.6c.
The market was cheered by more rigorous financial disciplines, tighter control of debtors, reduced capex and a rise in ancillary revenue alongside an ability to push through hefty fee increases. Student growth was a modest 3% but Curro has materially improved the payment ability of its base and thus its customer quality. The stock rose 10.25% over interim results with the p:e now at 16.2.
The key to Stadio’s growth has been the expansion of the number of professional qualifications on offer, now at 91
Following hot on the heels of Curro was AdvTech, with sparkling results on August 28. Strong growth from schools in South Africa and elsewhere in Africa, alongside continued robust performance from the resourcing division, saw revenue rise 16% to R3.9bn with margin enhancement throughout the company as operating leverage flowed, leading to profit before tax increasing 26% to R669m.
AdvTech is a strong cash generator, with HEPS for the six months rising 24% to 84.3c. On the back of the results, AdvTech rallied 8.6% and trades on a p:e of 14.6.
All divisions got top marks from the market, with the standout features being the schools in Kenya, where profits rose 73% to R47.7m, and the resourcing unit continuing its power run, delivering growth in profit of 44% to R49.7m.
CEO Roy Douglas said the inherent underlying demand for quality education, especially given AdvTech’s various price point offerings, strongly positioned the company for continued growth.
Last out of the playground was Stadio, releasing results on August 30. For the six months there was a surge in the number of students seeking the wide range of Stadio’s professional qualifications, with revenue rising 16% to R714m and profit before tax increasing 15% to R176.8m. HEPS rose 22% to 13.5c. For the six months, new student count rose 13% with the overall student base up 9% to 41,865.
The key to Stadio’s growth has been the expansion of the number of professional qualifications on offer, now at 91. CEO Chris Vorster said a further 47 are in the accreditation pipeline.
Stadio has funded all of its expansion from internal resources, and cash on hand in the period stood at R175m. The company has pushed the button on plans to build a large campus in Durbanville, Cape Town, to meet expected demand. Campuses in Krugersdorp and Centurion continue to attract new students, extending Stadio’s reach.
In the period, distance learners made up 86% of all students enrolled, with a year-on-year growth of 10% against 3% for contact learners. To date, Stadio has spent a cumulative R2.2bn to attain these results and is confident its pro forma listing target of 56,000 students and R500m in profit by 2026 will be attained. On these impressive results the market rewarded Stadio with a 13.4% hike, with the counter trading on a p:e of 27.
In assessing the IM report card and the results from the three counters, IM has to recommend one as its prefect. That stock is Stadio. IM remains impressed with its growth vector and since its JSE listing, Stadio has been consistent with its objectives and results. IM sees the counter offering a highly attractive growth runway for any investor over the longer term, and its asset-light, scalable format is an advantage.
Ongoing demand for quality tertiary education, given the inability of the state to meet requirements, alongside the crumbling of the once excellent Unisa campus, adds to the Stadio assessment and growth trajectory. With its own growth targets within reach, an ability to self-fund and a desire to pay fat dividends on maturity, Stadio remains IM’s star pupil.
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