It seems an obvious equation: bad and rapidly worsening government schooling plus desperate parents equals a boom for private education companies.
So why are both Curro and AdvTech, the two pre-eminent education firms listed on the JSE, trading so far off their highs of the past two years?
For fast-growing Curro, the problem is that it will probably have to dip into its investors’ pockets again.
Consider that net cash generated from operating activities fell 23% to R313m in the year ended December, while cash on hand dwindled to R571m from R706m the year before.
This has come as the company ratchets up spending on acquisitions and the building of new schools. In 2017 alone it spent R1.136bn on its schools business, for the construction of five new campuses across the country and the expansion of existing campuses. The amount includes R148m for "land banking". Spending will almost double to R2.3bn this financial year.
Sasfin Securities deputy chairman David Shapiro, who says he’s struck by how much better AdvTech has performed than Curro over the past three years, says Curro is "still not generating enough cash to fund its own expansion".
But Curro management disputes this. CEO Andries Greyling is adamant that cash flow "will materially increase" this year on the back of a rise in learner numbers and average fees, and he says the company is only committed to R1.1bn operational capital "for expansions and greenfield operations". That and the "land banking", he says, "will be financed through debt funding, as we’ve got enough capacity to do so".
Greyling does not see Curro going back to market to raise any equity capital, unless "material acquisitions come to the table".
Over a three-year period, Curro’s empire has grown considerably, from 41 campuses in 2016 to 59 by January 2018, while learner numbers increased by 48% over the same period, to 52,233. That’s chewed up capital: R1.02bn in 2015 and R1.7bn in 2016, for example.
For NeFG director Gerbrand Smit, neither AdvTech nor Curro is attractive enough to be tempting. "There was too much hype around them. ... It’s not the greatest business model out there — it’s capital intensive, and it takes time to build a new school, fill it up and make money out of it."
Smit is also worried that too much faith is being placed in consumers’ ability to cough up for private education, notwithstanding the rapidly declining quality of schooling offered by government.
This concern is to some extent borne out by the pace of AdvTech’s growth in student numbers, which it described as "muted" last year. Enrolments at its top-priced brands, such as Crawford, were "particularly affected due to financial pressures on some families and the effects of emigration and ‘semigration’", AdvTech said in its results.
Investec Asset Management small-cap portfolio manager Andrew Joannou is not keen on either company, and says Curro’s share price "discounts unreasonably optimistic expectations". He adds: "Even at R31/share (well off its R50/share peak), I think [the company] is one of the most overvalued counters on the SA stock exchange."
He calls Curro "a fine example of a good company being a potentially poor investment because the asking price is too high".
Curro trades on a p:e of 66, even though it disappointed the market recently with its reported profits, given the high p:e: R277m for the year ended December, a gain of 34% year on year.
Meanwhile Shapiro, who is not invested in either, says he expects AdvTech to outperform.
While Curro initially captured the market’s attention, AdvTech has far outshone its rival over five years. It’s gained 131%, excluding dividends, against Curro’s 68% rally. On a growth rate of between 15% and 20%, Curro’s multiple is "stretched", say some analysts.
"The results just don’t keep up with multiples, whereas AdvTech seems to be on a nice path at the moment," says Shapiro.
For the year ended December, AdvTech grew revenue by 22% to R4.08bn, while pretax profit inched up 3% to R541bn. Headline EPS fell 3%, to 69.1c.
However, AdvTech, which has big growth ambitions of its own, has a cash balance of even skinnier proportions than that of Curro. At the end of the financial year, it had cash and cash equivalents of a negative R103.4m, with capital commitments of R1.9bn as of end-December. The company also uncovered a three-year fraud of R48.1m after restructuring finance functions in the schools division.
It expects to spend R627.3m of the R1.9bn in the next two years, R572.1m in three to five years, and a further R711.6m after that.
Luckily, cash generated by operating activities remains chunky: R859m in the past financial year, an increase of 23%.
That’s helped AdvTech to continue paying dividends, notwithstanding its huge capex plan. It’s also what tends to swing investors toward the stock — that and its considerably lower p:e of 22.
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