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SIMON BROWN: I’m chatting now with Keith McLachlan. He is of course from Integral Asset Managers. Keith, I appreciate the early morning time. I want to touch on education stocks, but starting with Curro, who came out with results yesterday. Heps was up 26%, learners up only 3%. Bad debts from parents are kind of stable, although costing Curro almost R80 million. Other costs up 21%. Your take on the numbers?
KEITH McLACHLAN: Morning, Simon. Perhaps the way to frame it is how much airtime management at the presentation gave to bad debts. The meat of the presentation was about 20 slides, and in four of those 20% – well just under – was really about bad debts. This is the bottleneck. Learners grew 3%, which is really below par. We should be growing at 6% or 7% in this sort of environment. Ultimately the demand is almost infinite in South Africa for quality education at this sort of level. But that 3% growth is net of termination of long outstanding debts that attach to their accounts.
Obviously at the end of the day if you don’t pay your account your kids are going eventually to get kicked out of school because this is a commercial enterprise. I think that’s the bottleneck. They’re having to fill these schools.
By the way, this was the 25th anniversary of Curro. They’ve spent billions building schools and they need to fill them, but they need to be paid to fill them as well and really, in my opinion this is the key bottleneck. Curro is between a rock and a hard place in terms of adding learners into its schools but being appropriately remunerated for doing so. And that’s challenging, I suppose.
SIMON BROWN: We’ve got AdvTech out on next Monday with results. Their trading update said 21% to 26% higher. Are they going to run into a similar [situation] or are they in a slightly different place? Partly they are more established, perhaps, in terms of having their campuses and of course they’ve got tertiary as well.
KEITH McLACHLAN: Yes. So tertiary is another thing, and we’ll touch on that in a moment. But if you look at the school positioning of Curro versus AdvTech, AdvTech is mid- to high-LSM school positioning, whereas Curro is really mid to low. And particularly in the lower LSM they are far more vulnerable to the current economic events.
In fact there’s still a long-term knock-on from all the lost jobs and lost income, etc, during Covid. And in lockdowns Curro is far more susceptible to that. AdvTech has that, but not to the same degree. Where AdvTech is suffering is from emigration. You see, a lower LSM doesn’t have the option that a higher LSM does. Emigration pulls learners out of the middle grades. Don’t forget, you’ve only really got two grades – your opening grade in primary school and your opening grade in high school of learners into your school system. You really have attrition only out of the other grades.
AdvTech unfortunately is susceptible to emigration. But, that said, combined with the well-positioned tertiary side, combined with a range of other things, I think AdvTech’s results should show stronger learner increases and ultimately get better results.
Just circling back to Curro, the market is pricing it at a 25% discounted book. [It’s] effectively impairing Curro’s balance sheet for it, which makes sense when you see that Curro is still earning a mid single-digit return on equity, which is really far below the cost of equity.
AdvTech, on the other hand, is earning double-digit and, with the coming set of results, likely to be earning a very comfortable double-digit return on equity.
So these are very different businesses earning very different returns. At this point. AdvTech is likely to look a lot better.
SIMON BROWN: Yes. I’m looking at the charts. AdvTech is at five-year highs and just below the all-time highs from 2017. Curro not so much.
A quick last thought, Stadio – of course, Stadio is just in tertiary. A lot of that is distance learning. I can’t help thinking with Unisa and its problems [Stadio] should be doing better. Its share price is perhaps doing better than Curro’s, but lagging AdvTech’s.
KEITH McLACHLAN: Well, Stadio has the highest valuation of the three education stocks on the JSE, but it’s really pricing in the execution of the future strategy. And, as you touched on, with the collapse in Unisa really there is the booming demand for private tertiary. And in the background, some legislation has changed that allows or will allow the AdvTechs and Stadios to label their tertiary education ‘universities’, which is very, very important. So Stadio is superbly positioned, but a large amount of its business model at this point still sits in Excel spreadsheets, because it has to execute on it. And therein lies the stickiness. Do you believe in management’s execution or not?
SIMON BROWN: I take your point. It’s one thing to plan something, another thing perhaps to do it overall.
We’ll leave it there. Keith McLachlan of Integral Asset Managers, I always appreciate the early morning insights.
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