A little over a year ago, I picked ADvTech (ADH) as my preferred education stock (Pick of the education stocks) while highlighting the growth of Stadio (SDO). I did not like Curro (COH) at that point both operationally and from a valuation perspective.
While a single year is an arbitrary measure of performance, Stadio is the clear winner when you view the three stocks’ relative performance to each other.
Read: South Africa’s dysfunctional universities
ADvTech has generated a comfortable price return of around 12% and comes in middle place.
Dead last, Curro was the right stock to avoid.
Source: The author
Beyond price returns in the market, how are these businesses performing on the ground?
All three are about to report in the next month, so this is premature to speculate on.
What we do know is their year to 31 December 2022 results and how that performance related to the year prior:
- ADvTech: Revenue up 18%, headline earnings per share (Heps) up 20%, student enrolments up 5% (7% schools, 4% tertiary);
- Stadio: Revenue up 11%, core Heps up 18%, enrolments up 8%; and
- Curro: Revenue up 17%, recurring Heps up 35%, enrolments up 6%.
More recently though, we have had trading updates and AGM updates from Stadio and Curro.
The latter is expecting to report recurring Heps growth of between 26% and 45% year on year (y/y) while the former has reported continued growth in enrolments of 8% y/y into this year. ADvTech is yet to put out any update.
What is clear is that while Curro’s enrolments are weaker than the rest, it is degearing its balance sheet and driving efficiencies that are seeing its bottom line catching up with its share price.
Indeed, this once highly valued stock is now sitting on a price-earnings (PE) ratio of 14.6 times, which feels quite reasonable.
Read: Curro to invest R800m in capital projects in 2023
Likewise, Stadio’s growth profile is delivering steady growth, albeit on a share price with a 24.7 multiple that is clearly pricing in a fair amount of future growth. Almost the opposite of Curro, this multiple is increasingly starting to feel unreasonable.
Finally, the lowest valued stock is ADvTech’s 12.7 PE. Yet, if you look at the above, the group’s revenue growth is higher than both its peers. It has some financial leverage that sees its bottom line growing faster than Stadio, albeit with slower enrolment growth in the tertiary segment. When comparing ADvTech against Curro, ADvTech’s schooling side is growing enrolments faster!
We will see what all the coming results reveal in these education stocks. The starting half of the financial/calendar year is a key reporting period for these businesses as their enrolments that generate revenue through the year tend to be frontloaded into this period (students enrol at the start of the year). In other words, if there is a revenue miss now then it is nearly impossible to make this up in the second half, and thus you can expect a bad full year.
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Other key aspects will be to make sure debtors are under control, cash flows and balance sheets are healthy and, importantly, enrolment growth is maintaining a positive trajectory.
I want to see steady increase in returns on capital at Curro, an above-market growth rate in Stadio enrolments (they’ve got to grow into their multiple!), and ADvTech should have a balance growth profile that is slightly elevated from (continuing) growth in their African operations.
Read: AdvTech’s rest of Africa operations boosts FY earnings
While these coming results may change my opinion, at this junction and despite the one-year view of share price performance, ADvTech still stands out as the quality stock at a reasonable valuation in this sector.
I remain comfortable sticking with that view.
Keith McLachlan is chief investment officer at Integral Asset Management.
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