Over the last month and a half, the three JSE-listed education stocks have reported their 2021 results (all have December year-ends, so the results are comparable).
On the 23rd of February, private schooling group, Curro (COH), reported revenue growth of +15% from +9% learner growth (& fee increases), good cash generation and a strong recovery in earnings after the prior period’s impairments. On the 14th of March, tertiary collection, Stadio (SDO), reported +9% student growth, revenue rising +18% and earnings up somewhat more. Finally, last week, diversified educational group, ADvTech (ADH) reported +6% learner growth driving revenue growth of +8% (there were no fees increases in their Schools segment) and earnings lifting +35%.
How do these stocks compare to each other?
Zooming into key metrics—financial, operational & market valuation—we can see more clearly:
| School pupils (% y/y) | Varsity Learners (% y/y) | Revenue (% y/y) | FY 21 Earnings* (% y/y) | Net Debt:Equity (%)** | Interest Cover (x)*** | EV/EBITDA (x) | |
| ADvTech | 9% | 4% | 8% | 35% | 52% | 6.9x | 8.3x |
| Curro | 9% | – | 15% | 37% | 44% | 3.0x | 12.4x |
| Stadio | – | 9% | 18% | 24% | 5% | 17.5x | 11.5x |
* Using each company’s own “normalized” version of earnings per share; ** Including IFRS 16 leases; *** Operating Profit / Net finance charges
A couple observations from the above comparison of these stocks:
- While ADvTech’s revenue is growing the slowest, management have driven efficiencies that translate into excellent earnings growth:
- One of the reasons for the slower revenue growth was that AdvTech froze its School segment’s fees. This likely improved these schools attractiveness to cash-strapped consumers and the good schooling enrolment growth (the same as Curro’s supposed growth story!) is arguably a result of this.
- The efficiency drive within AdvTech’s is also starting to bear tangible benefits. In the recent results presentation, management were slow to quantify expected future benefits of this efficiency drive but expect a lot more to come through.
- While Curro is keeping its revenue run-rate in double digits, its interest cover is half that of AdvTech and a fraction of Stadio’s:
- This is despite Curro’s recent R1.5bn rights issue that paid down (temporary) debt with (permanent) equity. Always a tough trade-off and, typically, only made when management teams have no options left.
- The fee increases at Curro schools was also probably needed to help handle this irksome capital structure, though each round of fee increases here erodes Curro’s core value educational offering relative to competitors that do not increase their fees. This may have a negative impact on future enrolment periods…
- Stadio stands out as the lowest geared group, and its varsity learnership numbers are growing quicker than AdvTech’s Tertiary segment. Interestingly, top-line growth was eaten up by equivalent (operating) cost expansion and earnings growth was more muted than both Curro & ADvTech:
- Stadio’s cost expansion is likely due to the build-out of the Group’s capacity, structure and new campus to accommodate its aggressive 100,000 student target.
- Hence, although the balance sheet and income statement are lowly geared, one does wonder what the capital structure of this group will look like after the building is done? When Stadio builds it, will the students actually come? A lot of capital is betting the answer to that question being “yes”.
- Given the large differences in capital structure, capacity growth and, even, strategy, it is worth noting that the EV/EBITDA (think of this metric as a “debt-neutral Price Earnings”) of AdvTech is materially lower than the other two counters.
All things considered, I would argue that Curro is currently the poorest of the JSE-listed investment options (fee-driven growth, high gearing, straining balance sheet & the most expensive share), while ADvTech and Stadio both appear better quality. Stadio, though, has a higher valuation than ADvTech, more concentrated portfolio and a less tested growth profile.
Thus, via process of elimination, I would have to say that the pick of the domestic education sector has to be ADvTech with a balanced schooling & tertiary portfolio and top-, bottom- & volume-based growth trajectory.
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