Isn’t it time for JSE-listed private education groups AdvTech and Curro to be talking — again?
Just over two years ago Curro abandoned a hostile takeover of AdvTech, which was then headed by the combative and shrewd Frank Thompson. AdvTech put up strong resistance to fend off the unwanted advance.
As is often the case when corporate foundations have been under siege, the company subsequently stormed into a new growth phase. In fact, AdvTech’s share price has grown by about 70% since the takeover attempt, compared with the more pedestrian 15%-20% achieved by Curro.
Though both AdvTech and (in particular) Curro have experienced slightly less exuberant sentiment in the past few months, there remains huge potential for growth in private education, with estimates that of the almost 13m learners in SA only about 5% are accommodated in private schools. This market, it has been suggested, could double in the medium term — perhaps even quadruple over the longer term — as additional lower-fee private schooling options are rolled out.
Recent interim results released by AdvTech and Curro show both companies at critical junctures in their strategic paths. Most intriguingly, each company is showing strength in areas where the other is experiencing vulnerability or still finding traction.
Growth in AdvTech’s schools division — which includes brands such as Crawford, Trinityhouse, Maravest, Abbotts and Centurus — slowed to 10% at top line and just 5% at operating profit levels.
Curro, on the other hand, managed a 24% hike in revenue and a 26% increase in operating profits. If the small Meridian school segment, which offers private education at lower fees than the core Curro brand, is stripped out, the schools segment recorded a dashing 28% gain in revenue to R915m and a 34% jump in operating profits.
While Curro’s school division’s earnings were slowed slightly by Meridian, mainly owing to dwindling pupil numbers at its sprawling Northern Academy in Polokwane, AdvTech suffered at the very top end of its schools brand offering. A higher than expected number of pupils departed because of emigration and financial pressure, mainly at brands such as Crawford College and Trinityhouse.
AdvTech’s breakdown of learner numbers indicates a net gain of 578 to 24,498 from the end of 2016 to July 2017, with 1,788 learners recruited and 1,210 leaving.
CEO Roy Douglas stresses that the problem lies not with enrolment but departures. A further breakdown in learner numbers by the brand shows departures of 43% due to emigration at the Crawford, Centurus and Junior colleges brands. Trinityhouse was slightly lower, at 30%, with less at more affordable options such as Maravest (21%), AdvTech Academies (15%) and Abbotts (9%).
Interestingly, Douglas says demand for the lower-fee AdvTech Academies is ahead of expansion. He says that with new projects in the pipeline AdvTech is expected to deliver good growth in the mid-fee sector.
This is the same niche in which Curro is finding its growth traction and has built a formidable operating presence and an increasingly recognisable brand.
With that in mind, one has to ask: does this mean that Curro, which has a serious tract of development land already banked, has shut out AdvTech from the prime properties for lower-fee schools?
There are also other contenders in this segment, including recently listed Pembury Lifestyle Group.
AdvTech, under its AdvTech Academies banner, opened Founders Hill College in 2016 and Copperleaf College this year. In the short term Mooikloof (2018), Wilgespruit (2019) and Sibaya (2020) will be coming on stream.
AdvTech has already pencilled in a R3bn target from its schools division by 2020, which would be double the full-year revenue for the 2016 financial year. The official target is for 115 schools by the end of 2019, representing a fairly brisk pace of 10 new schools a year.
A concerted thrust further into Africa (in schools and tertiary education) will certainly help bolster the top line, taking into consideration the development of a sizeable Crawford International School in Nairobi, Kenya.
It may also be worth watching the development of The Bridge, a new remedial school offering. The first school will open in Gauteng next year, and AdvTech also sees opportunities in Little Falls (Roodepoort), Durban and Cape Town. If the company can maintain the operating margin at about 19% in its schools, this division could be posting operating profit of R570m in 2020.
In the meantime it is clear that Curro’s development pace, officially set at a minimum of seven new schools a year, is not about to slack off. CEO Andries Greyling says the company is on track to achieve its target 80 campuses by the end of 2020.
That target is almost certain to be comfortably exceeded — which is significant, considering that Curro’s margin of earnings before interest, tax, depreciation and amortisation (excluding the Meridian schools) is 25%, and well on the way to the longer-term sustainable target of 40%.
This year Curro is investing R600m in new schools, including Curro Academies at Mamelodi and Diepsloot, and Sunningdale in Cape Town, as well as high schools at Roodeplaat in Pretoria and Sitari in Somerset West.
Another R900m will be spent on expansion and upkeep at existing schools.
Greyling also confirms that, despite an ongoing growth push, Curro is unlikely to tap shareholders for further funding, unless a major acquisition opportunity comes into view.
Operational cash flow in the past interim period was a reassuring R262m (equivalent to 64c/share), while net cash generated came in at R167m (roughly 40c/share).
While Curro’s schools division might have stolen a march on AdvTech’s school brands,
the complete opposite is true for the tertiary offerings. Curro is still developing a meaningful tertiary hub under Stadio Holdings, which is headed by former CEO and company founder Chris van der Merwe.
In the six months to end-June, Stadio — which will list on the JSE later this year — generated R34m in revenue and about R6m in operating profits. The amount of new capital to be raised at listing will probably be more instructive about Stadio’s longer-term ambitions than the interim numbers, or even recent acquisitions.
AdvTech is already a tertiary powerhouse, with revenue growing by 33% to R789m and operating profit by 56% to R157m in the interim period ending June.
The core of its tertiary offering lies in the Independent Institute of Education (IIE), which includes Rosebank College and Varsity College.
A revamped Rosebank College looks set for an aggressive rollout, with the current Rosebank College campuses in Braamfontein (Johannesburg) and Sunnyside (Pretoria) soon to be
supplemented by Durban, Bloemfontein and Pietermaritzburg (all next year), as well as Cape Town, Nelspruit and Port Elizabeth in 2019.
There are also plans for a connected campus based in Polokwane.
Varsity College offers schools of management, law, psychology and communication, finance and accounting, as well as education and information technology across eight
campuses.
Considering the scale of the IIE, there’s little doubting AdvTech executives’ contention that the division is essentially "the largest private university in SA".
AdvTech recently made select acquisitions in the culinary and hotel management space, and will probably snag further niche acquisitions. But gut feel is that an acquisition spree on the tertiary front is highly unlikely; Douglas is already suggesting that vendor expectations have been raised by the flurry of corporate activity in the sector.
This sentiment was echoed recently by RECM & Calibre CEO Piet Viljoen, who stressed that the near-term objectives for its investment in tertiary education related to the development and building of accreditation.
He said: "This might take a bit longer, but it is certainly a lot cheaper than buying them in the market at present."
In short, this might not be the easiest environment for Curro’s Stadio to start building scale, considering that AdvTech’s investor presentation stresses that barriers to entry are high and that retaining registration and accreditation is "resource intensive".
What’s more, regulatory inefficiencies mean that it can now take up to two years to get a qualification accredited.
Stadio’s growth ambitions will become clearer only when the details of the prelisting capital raising are disclosed.
Van der Merwe’s (frankly astounding) successes in rapidly building Curro’s network probably means that Stadio — with PSG Group as an anchor shareholder — will not lack market support for its fundraising endeavours.
But the fragmented nature of the tertiary market and the regulatory environment might well mean that Stadio will require more time than Curro to assemble critical mass and find growth traction.
Stadio shareholders will, however, take heart that the more established AdvTech is still signalling substantial growth potential in the tertiary sector. AdvTech has pencilled in a target of 100c/share for its 2018 financial year, and it aims to almost quadruple its tertiary revenue to R2.2bn by 2020 from R592m in financial 2016. Considering an interim margin of almost 20%, the operating profit number on this forecast is rather sumptuous.
Returning to the initial question of whether AdvTech and Curro should be talking, there is probably a slim chance the two private education rivals might reconvene around a table in the short term, mainly because both corporate bodies are still bruised from the 2015 tussle.
But an impartial observer might regard the two companies as offering an opportunity to merge into a multibrand private education juggernaut tapping the higher, middle and lower segments of the private-school market as well as becoming the standard bearer for "private universities", coupled with an array of specialist training courses.
The Financial Mail considers that a combined AdvTech/Curro entity would have the potential to generate more than R10bn in high-margin revenue by 2020 through compelling offerings across the most lucrative segments of the private education sector in SA and Africa.
The earnings multiples of Curro (78 times) and AdvTech (23 times) realistically rule out any chance of constructive engagement — though the Financial Mail has no doubt that the respective executives cast envious glances at certain parts of each other’s operations.
Still, in a fast-growing private education market that remains fragmented at both school and tertiary levels, not to mention small in relation to the public domain, anything is possible over the longer term.
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