We’ve seen some interesting recent news from the listed higher education businesses. AdvTech is the standout, with a plan to build a university in the heart of Sandton. It will combine two existing campuses (IIE’s Varsity College Sandton and Vega Bordeaux) into one, thereby doubling capacity for students and obtaining a valuable site right in the country’s economic heart. Clearly, AdvTech is confident about demand for private education, especially that which is offered in person rather than online. Covid is a rapidly fading memory for most businesses.
Sector peer Stadio is organised into three higher education institutions: Milpark Education, Stadio Higher Education and Afda. This gives you an idea of the breadth of qualifications on offer. The Stadio integrated report for the year ended December 2023 reveals an interesting difference between private and public institutions. The launch of sport at Stadio Higher Education was one of the highlights noted in the report. Most private tertiary education businesses are focused almost entirely on the qualifications being offered, whereas public education institutions have a substantial research component and create a full student experience that includes sports and various other traditions. Somewhere in the middle is surely the sweet spot, and the players in this market will keep innovating to find that balance.
This is an exciting industry in South Africa that is evolving at speed, with demand for public institutions far outstripping supply. This creates a strong need for private tertiary education to make up the gap, especially in fields of study that make economic sense thanks to the jobs they can unlock. For most people, tertiary education can be justified only if they lead to meaningful employment opportunities that claw back the cost of studying. Only the very privileged few can afford to go to varsity for the sake of it and study qualifications with dubious career prospects.
Another reason for the rise of private institutions is that they avoid the political quagmire in South Africa. You won’t see #FeesMustFall protests at private colleges. They also won’t have admission requirements that are influenced by a broader political ideal. A state-funded institution needs to fall in line with the spirit of broad-based BEE rules and regulations. It doesn’t matter whether you agree with any of these concepts or not. What matters is that when something isn’t allowed to operate as a free market, it creates opportunities elsewhere. Groups like Stadio and AdvTech know this and have taken full advantage of this. Spotting these gaps is the way to make money in emerging markets.
The outperformance of tertiary vs primary and secondary education has been breathtaking
And my, how they have made money! Stadio’s share price is up 185% over five years. AdvTech isn’t far behind, up 170%. It’s always worth remembering that Stadio is the pure play in this space; AdvTech, apart from its high-quality offerings in primary and secondary education, has a resourcing business that is begging to be sold. I maintain that the market would reward AdvTech for getting the resourcing business out of there.
Over the same period, thanks to a rights issue and a less appealing business model, Curro is down 29%. The outperformance of tertiary vs primary and secondary education has been breathtaking. Curro has a capex-heavy business model that must compete against a vast array of schooling options. The listed tertiary businesses are more capital efficient thanks to a hybrid model of on-campus and online offerings. They also enjoy their market positions as some of the most respected private institutions in the country, leaving the long tail of other private tertiary institutions to fight for the scraps.
Competition is just another way of talking about pricing power, which is perhaps the biggest difference between tertiary and primary/secondary models. There’s always an alternative to Curro for your children, even if the other schools nearby aren’t quite as good. In the tertiary space, there either isn’t an alternative within the same area (and sometimes not even within the country for more specialist qualifications), or the alternatives are poorly regarded and don’t carry nearly the same gravitas in the market with prospective employers. Either way, it feels like efforts to differentiate in the tertiary market are handsomely rewarded, whereas the primary and secondary market is more of a competitive bloodbath.
AdvTech plans to invest R419m over two years in the Sandton campus, offering undergraduate to postgraduate qualifications. Not least of all thanks to the expected resurgence in local conditions, it feels like a great opportunity. Now if only it would sell that resourcing division!
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