Curro: still a growth story

JSE-listed independent school company Curro is in its 21st year of operation and is still a good growth story.  “They’ve got very stretching and interesting goals. They want to invest; management is motivated and wants to continue to challenge themselves,” says Bright Khumalo of Vestact.

“The demand for a value educational offering remains strong, as State education continues to disappoint,” adds Shaun Murison, market analyst at IG South Africa. “This structural demand feeds into a continued growth opportunity for Curro.”

In a February 2016 edition of its Fast Facts, the Institute of Race Relations said independent schools have seen a huge increase in enrolment since 2000. “Such schools are a growth industry because parents flee the poor quality on offer in many public schools. Enrolment at independent schools is likely to continue growing unless curbed by some form of government regulation.”

“I like the schooling business models. [Schooling is] a very resilient business: even when the economy around it is not doing so well. Schooling businesses have high margins; parents have higher earnings potential and won’t compromise on their children’s schooling,” says Khumalo.

For the year ended December 31 2016, Curro’s number of schools was up 15% – from 110 schools at the start of 2016 to 127 schools; there are now 54 campuses; and learners enrolled increased 14%: from 41 864 in January 2016 to 47 589 at the beginning of 2017.

Curro aims to have 80 campuses or 200 schools by the end of 2020, with approximately 80 000 learners by the end of the next financial year.

It invested R1.7 billion, most significantly in building nine new campuses to the value of R763 million. It plans to boost this up to R1.8 billion this year, funding the investments through own cash and debt funding.

“Growth will also continue to be accelerated by acquisition which the group has a positive track history of. This however leads into significant capital expenditure and possibly further rights issue dilutions to fund, as the group has done multiple times in the past,” says Murison.

Good results

The education sector is not immune to the impact of the economic downturn in South Africa, said Curro, however its results were still quite good.

Headline earnings were up 69%, from R100 million to R169 million, while basic headline earnings per share (Heps) increased 55%, from 28.3 cents to 43.9 cents. The latter was due to the share dilution from the rights issue in May 2016, says Murison.

Basic earnings per share were up 61% at 44.7.

Revenue was up 27% to R1.761 billion (2015: R1.384 billion); earnings before interest, tax, depreciation and amortisation (Ebitda) was up 33% to R387 million (2015: R292 million), due to higher learner numbers. “Satisfactory Ebitda margin growth is evident in schools where capacity utilisation increases,” says Curro.

During the year, Curro raised R1 749 million in equity funding via a rights issue; two private placements; and through shares issued to its employees through a share incentive scheme.

Operating expenses were up 26% to R1.374 billion (R1.092 billion). Bad debt was at 1% of turnover.

Although none was declared this year, the company plans on issuing dividends in 2019.

Still expensive?

In May 2016, the company’s price-to-earnings (P/E) ratio was around 140 times. With the latest profit number it was down to around 110.

Murison says the P/E multiple has improved, although it remains very high. “Put into context though, the positive absorption of earnings from acquisitions and growing learner numbers have improved the P/E multiple from around 270 times in 2014 to where it is now.”

Khumalo doesn’t believe too many people are buying the share at the moment, but if they are, they are probably looking at other metrics to value the business.

However, he believes the P/E will continue its downward trend. “Usually the P/E will continue to go down as the company has double-digit growth.”

New tertiary company

To align itself for future growth in tertiary education, Curro has separated the schools and tertiary education businesses. It will list a yet-to-be-named tertiary education company on the JSE this year.

Khumalo believes management will try to apply the Curro growth model to the tertiary education business and that “it’s easier and cleaner if the two are separate”.

“Curro listed in 2012, and since then it’s undertaken massive rights issues to ramp up quickly. If it did the same with the tertiary-education business it would end up tapping shareholders for more money. In listing it separately, its growth won’t affect Curro’s numbers,” he says.

As there are a limited number of universities in South Africa, not all matriculants with university passes are accepted to study – as such a large number end up at home. “This creates a great opportunity to cater for students. Embury is a niche offering, focusing on niche university degrees. It has a licence to run fully-fledged university model, offering degrees that are in high demand,” clarifies Khumalo.

“If the group can capitalise on making further inroads into the tertiary education sector, it furthers the growth potential for the business,” says Murison.

Ringing in corporate changes

Curro also announced that founder Dr Chris van der Merwe will step down as CEO, effective from July 1, and will be succeeded by COO Andries Greyling.

Van der Merwe is to be a non-executive director and strategic advisor to Curro Holdings (schools).

Read more here.

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