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Over the past month and a half, all three JSE-listed education stocks have released their 2021 results (all have a December year-end, so the results are comparable).

On February 23, the Curro Private School Group (COH) reported 15% revenue growth on the back of 9% learner growth (and fee increases), good cash generation and a strong profit recovery after the impairments of the previous period.

On March 14, Tertiary Collection Stadio (SDO) saw student growth of 9%, revenue up 18%, and revenue up a bit more.

Finally, last week, diverse education group AdvTech (ADH) reported 6% learner growth leading to 8% revenue growth (there was no fee increase in its schools segment) and a 35% increase in profits.

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How do these stocks compare?

By zooming in on the key indicators – financial, operational and market assessment – we can see more clearly:

Students (% y/y) University learners (% y/y) Turnover (% y/y) Profits for the year 21* (% y/y) Net debt:equity (%)** Interest coverage (x)*** EV/Ebitda (x)
AdvTech 9% 4% 8% 35% 52% 6.9x 8.3x
Courro 9% 15% 37% 44% 3.0x 12.4x
Stadium 9% 18% 24% 5% 17.5x 11.5x

* Use of each companyy its own “normalized” version of earnings per share; ** Including IFRS 16 leases; *** Net operating income/financial expenses.

A few observations from the above comparison of these stocks:

  • While AdvTech revenue is experiencing the slowest growth, management has made efficiencies that are translating into excellent earnings growth:
    • One of the reasons for the slower revenue growth is that AdvTech froze fees for its school segment. This has likely enhanced the attractiveness of these schools for cash-strapped consumers and the good growth in school enrollment (the same as Curro’s supposed growth story!) is no doubt the result.
    • The quest for efficiency within AdvTech is also beginning to bear tangible fruit. In its recent earnings presentation, management was slow to quantify expectations to come up benefits of this search for efficiency, but expects much more to materialize.
  • While Curro maintains its double-digit revenue rate, its interest coverage is half that of AdvTech and a fraction of that of Stadio:
    • This is despite Curro’s recent R1.5 billion rights issue which repaid (temporary) debt with (permanent) equity. Always a difficult compromise and usually only made when management teams are out of options.
    • Curro’s school fee increases were also likely necessary to help manage this cumbersome capital structure, though each round of fee increases here erodes Curro’s heart. assess educational offer compared to competitors who do not increase their fees. This may have a negative impact on future registration periods…
  • Stadio stands out as the least fit group, and its number of university learners is growing faster than AdvTech’s tertiary segment. Interestingly, revenue growth was swallowed up by equivalent (operating) cost expansion and earnings growth was more subdued than Curro and AdvTech:
    • Stadio’s increased costs are likely due to building capacity, structure and the group’s new campus to accommodate its aggressive goal of 100,000 students.
    • Therefore, although the balance sheet and income statement are not very oriented, one wonders what the capital structure of this group will look like after construction. When Stadio builds it, will the students actually come? Many capitals are betting that the answer to this question is “yes”.
  • Given the vast differences in capital structure, capacity growth and even strategy, it should be noted that EV/Ebitda (enterprise value/earnings before interest, taxes, depreciation and amortization) – consider this measure as a ‘debt-neutral price-to-earnings ratio’ – from AdvTech is materially lower than the other two counters.

All things considered, I’d say Curro is currently the poorest of the JSE-listed investment options (fee-driven growth, high gearing, stretched balance sheet, and most expensive share), while AdvTech and Stadio both seem better quality. Stadio, however, has a higher valuation than AdvTech, a more concentrated portfolio and a less tested growth profile.

So, through the process of elimination, I must say that the choice of the national education sector must be AdvTech, with a balanced portfolio of schooling and higher education and a growth trajectory based on the top, bottom and volume.

Keith McLachlan – Chief Investment Officer of Integral Asset Management.

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