BUY: Curro
Curro Holdings is a focused provider of affordable, high-quality schooling for more than 70,000 pupils across South Africa. Established in 1998, it grew rapidly and attracted a high valuation multiple, reaching as high as 50 times earnings during its growth phase. Now the business is in a more mature phase, with growth coming from the expansion of existing schools and the natural progression of pupils through the grades. The addition of pupils to the existing cost base will improve margins and increase the return on equity (ROE). However, the share price has declined by 30% this year amid fears that the country’s difficult economic environment could weigh on enrolment. As a result, Curro now trades on an earnings multiple of 11. This presents an attractive opportunity to invest in an education business in one of the most defensive sectors of the economy. I expect pupil numbers to increase at Curro as parents prioritise spending on their children’s education. This, coupled with management’s focus on increasing ROE and the resultant rising dividends, makes for a great investment return.
SELL: Mr Price
The share price is fully discounting improved prospects. The stock experienced a significant rerating after the formation of the GNU, becoming a preferred choice for international and local investors. This appeal stems from its focus on South Africa, its absence of international operations and its predominantly cash-based model. The group’s vision is to become the most valuable retailer in Africa, but there is a risk that achieving this goal may involve a substantial acquisition, which could dilute the quality of the core business and divert management’s focus from key priorities. Structural challenges are also emerging — including increasing competition from pure online retailers and heightened rivalry in the home segment, where Mr Price’s leading market share is most at risk. For these reasons, the current share price appears fully valued and there are better investment opportunities elsewhere in the local market.
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