It wasn’t too long ago that analysts were jokingly telling investors to sell their kidneys and buy shares in Curro Holdings.
The argument was that it would be the education sector’s answer to Capitec, which has more than tripled in value in the past five years.
A cursory glance at Curro’s share price over the same timeframe will have punters thanking their lucky stars for not taking that advice.
Curro has been languishing in the doldrums for some time, falling to below R14 from almost R60 at the start of 2016. So what’s gone wrong for the private school operator?
"When you’re a share with near godlike status the only way to sustain that sentiment is to remain perfect," says Anthony Clark, an independent small-caps analyst at Small Talk Daily.
"But the current earnings growth, particularly when viewed in light of capital expenditure and lack of capacity utilisation over the past couple of years, doesn’t cut the mustard."
Curro, he says, expanded far too quickly and in too many locations. So when the economic malaise started to hit, it really felt it.
"Curro is now seen by the market as a mere mortal company."
Chief among Curro’s challenges is that it has opened 17 new campuses in the past two years, necessitating an almost 31% increase in cumulative capital investment over that time. With debt having increased to almost R3.2bn and net financing costs up 49% to R109m, as detailed in the latest results for the six months to end-June 2019, the relatively pedestrian earnings before interest, tax, depreciation and amortisation (ebitda) growth of 21% hasn’t assuaged the market.
Also weighing on investors’ minds is that Curro’s oft-repeated ebitda margin target of 40% has not yet materialised.
The ebitda margin in the latest interims was 28%, only slightly better than the 25% for the 12 months to end-December 2018.
Keith McLachlan, a portfolio manager at AlphaWealth, says Curro’s targeted 40% ebitda margin has always been premised on the assumption that all schools would be running at full capacity.
The group’s current overall capacity sits at just 70%, though learner numbers are still growing at double digits in spite of emigration and stressed consumer spending.
Even if you look only at Curro’s older schools — those built in 2009 and before — capacity utilisation is still just 85%.
"On average," says McLachlan, "it takes a school around 10 years to mature, so if the older schools aren’t running at full capacity it becomes painfully clear Curro is not going to hit its 40% ebitda margin target anytime soon.
"Curro remains a well-capitalised business with a good product but the market has rerated the share on the expectation of a coming miss in prior expectations."
That rerating is reflected by the almost 70% slump in Curro’s share price since the start of 2016. Although that has resulted in a far more palatable p:e of just over 18, it does pose the question of whether the share’s decline is enough to make it a worthwhile punt for value investors with a longer-term view.
"You can buy AdvTech on a 12 times multiple and you get both a schools and tertiary education business," says McLachlan.
AdvTech owns private school brands Crawford College and Trinity House as well as tertiary brands Varsity College and Vega.
"Like Curro they also have pressure points on the school side but the tertiary business is very attractive."
Clark agrees that AdvTech is an attractive proposition but believes the group will have to invest in expanding its tertiary footprint, as a strained public tertiary education sector boosts demand for private alternatives.
That’s likely to be a drag on earnings as AdvTech is forced into further capital expenditure to bulk up its tertiary capacity.
"If you don’t already hold Curro I’d look to buy between R12 and R14 a share on the basis that there’s likely to be a recovery between now and the 2021/2022 results as the group grows into capacity utilisation," says Clark.
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