For those still wanting to do their homework on fast-growing private education specialist Curro Holdings, the latest annual report has some useful information. What caught my eye is that Curro, despite its aggressive expansion, has kept its discipline around bad debts.
The annual report notes that school fees have on average increased by 9.5%, or 11.2% if acquisitions and new schools that opened in 2016 are excluded. Net bad debts as a percentage of revenue were 1.1% in the year to end-December 2016. The figure was 1.2% in financial 2012, and in the ensuing years has never reached higher than that percentage. In fact, in financial 2014 the net bad debt ratio percentage was just 0.4%.
Considering the astounding top-line growth notched up by Curro since listing in 2011, this is a commendable achievement that will reinforce notions that the company’s long-term business model is sturdy.
Curro parents — like those in many other schools — are offered a 5% discount off annual school fees to encourage prepayment. The annual report disclosed that from December 2015 to 2016, prepaid school fees increased by 64% to R171m.
A bigger proportion of prepaid school fees could become increasingly important if Curro starts tapping new areas where schools take a little longer to move up the profit J-curve. Curro’s schools are generally loss-making in their first year, with break-even usually achieved in the second. Schools can take between five and eight years to reach near-full capacity (more than 85%).
At this juncture, Curro’s schools are operating at about 52% of eventual capacity and at approximately 70% of current built capacity.
But the key consideration is that once a Curro school is operating at more than 75% of its capacity, earnings before interest, taxes, depreciation and amortisation (Ebitda) margins of 40% can be achieved.
The annual report reiterates that Curro’s target Ebitda remains 40%.
The bigger picture is that global trends for independent school numbers indicate that independent schools are moving towards making up 20% of the total number of schools. If SA private schools, now comprising a multitude of brands, mimic this trend then Curro — which started 2017 with 127 schools — will comfortably overshoot its "official" target of 80 campuses or 200 schools by the end of 2020.
A win ... finally
It took the longest time for small industrial services provider Winhold to find a buyer. The company has been under cautionary since November 2015, and even long before that there was persistent speculation on whether the big share price discount on the company’s tangible net asset value (NAV) would attract predators.
Market talk was that the major shareholder wanted a price close to NAV, which was understandably a hindrance to deal making, considering SA’s ravaged industrial landscape.
So there was some surprise when unlisted Wafima Manufacturing & Distribution Holdings proposed acquiring 100% of Winhold for 125c/share. The offer has the support of 68% of Winhold’s shareholders, so it seems likely that a deal will materialise.
On paper, the offer seems fair, considering that before Winhold went under cautionary about 18 months ago the share was trundling along at levels between 50c and 70c. At last count — end-September 2016 — Winhold boasted a tangible NAV of 208c/share. But the company — a curious mixture of packaging (Gundle Plastics) and industrial supplies to the mining and industrial sectors (Inmins) — was more than a deep-value play. Earnings for the year to end-September 2016 came in at 13c/share, backed by decent cash flows. A recent trading update pencilled in 6c/share for the interim period to end-March.
Wafima certainly does not appear to be overpaying ...
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