Sunday, January 16

Curro needs the children to go back to school


The latest results from Curro Holdings show that the Covid-19 pandemic affected the PSG Group’s attempts to provide a better education to the average family – normal working people who are disappointed in public schools – extremely harshly.

Schools are growing and attracting more academics, but costs are rising faster than revenue.

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Furthermore, many families simply could not afford to pay school fees when their employers cut their working hours or lost their jobs.

Curro had to cancel large amounts, even after offering discounts on school fees.

Earnings before interest, taxes, depreciation and amortization (Ebitda) decreased by 16.3% to R390 million in the six months to June 2021 compared to R466 million in the first half of the previous financial year.

Overall earnings and general earnings per share (EPS) decreased by almost 28% from R160 million to R116 million and by 49% from 37.9 cents to 19.4 cents, respectively.

Summary of provisional results as of June 30, 2021

(Rm) 2021 2020 % change 12m Dec 2020
Income 1 784 1 590 12.2% 3 094
Ebitda 390 466 -16.3% 686
Profits 161 30 437% -108
Title EPS 19.4c 39.7c -49% 36.4c
Dividend per share 0c 0c 10.04c
Share price 11.75 R
12 months maximum 12.61 R
12 month minimum R 7.69
Earning rate over price Sixty-five

Source: Curro Holdings interim results, JSE market data

While earnings increased by more than 400%, overall earnings per share declined due to heavy dilution when Curro had to force an issue of rights to his shareholders towards the end of the 2020 financial year. The number of shares in issue increased from 412 million to 598 million.

Read:

Apart from the separation of Capitec, what is PSG up to?
Rights issues: from trickle to stream?

Costs rise rapidly

The income statement immediately shows that costs are increasing faster than income.

During the six months under review, revenue increased by just over 12% from R1.59 billion to R1.78 billion. The average number of students increased by 7.2%, from 61,746 to 66,167 at the end of the first semester of the financial year.

While management praised the increase in revenue and student numbers, employee costs increased by 30% and other expenses by 23%. The other expenses include the cancellation of unpaid installments.

Bad debts and discounts

Curro CEO Andries Greyling notes that the levels of insolvency and discounted rates were higher than those experienced by the company the previous year, which were also higher than before the pandemic.

“Curro granted a non-recurring discount of R60 million to its customers due to the Covid-19 pandemic,” says Greyling.

“If the Covid-19 discount given the previous year is excluded, the discounts increased marginally to 9.1% of tuition fees from 8.8% in the comparable period.”

Greyling says the non-productive portion of the debtor book relates primarily to students who have left Curro, adding that concerted efforts are being made to get them back and that the situation has improved. “The quality and age of pending accounts for enrolled students improved during the first half of this year.”

Curro’s own debt situation does not look good either.

The balance sheet reveals that debt remains high, despite the 1.5 billion rand rights issue less than a year ago. In fact, the cash flow statement shows that all of the R1.5 billion went towards debt repayment and more. Curro then paid off more than R2 billion of its debt.

Unfortunately, debt levels are increasing again, from R4.3 billion at the end of December 2020 to R4.4 billion at the end of June 2020. The level peaked at R5.7 billion a year ago, before the capital of R1.5 billion. injection.

Not good

“It’s not a good result,” says Keith McLachlan, chief investment officer at Integral Asset Management.

He explains: “Curro is achieving the benefits it hoped for, even considering the long-term nature of building schools and filling them with students.

“It takes time to build a new school and reach its capacity. Basically, they are expanding one grade at a time, adding a new class each year as students move from grade to grade.

“Newer schools take several years to break even.

“But even considering this, the most mature and crowded schools are not achieving the returns investors expected,” says McLachlan.

He notes that Curro’s older schools are achieving returns of around 28%, while previous estimates pointed to returns of up to 40%.

“It is difficult considering the target market and the devastating effect of Covid-19.”

Too optimistic

Investors had high expectations, perhaps too much. Curro received a warm welcome when it was listed on the JSE in 2011.

The success of adding schools and children to school benches caused the ratio to steadily rise to a maximum of more than R57. Investors were obviously delighted that PSG worked its magic and found another winner.

But the gains didn’t follow, and it’s been downhill for shareholders ever since.

The stock hit a low of just R4.85 in March 2020 during the Covid-19 crash. Since then it has recovered to R11.75.

This presents an enigma. Already 80% below its all-time high, the latest figures put the stock at a demanding price-earnings (PE) ratio of nearly 70 times based on overall earnings for the past 12 months.

While management notes that earnings will accrue more evenly in the current year, the latest results would indicate an advance PE of not much less than 30 times. This indicates that shareholders continue to expect strong growth from what still seems like a good business opportunity.

“Curro’s primary goal continues to be to increase the capacity utilization of its existing facilities,” says Greyling.

Unfortunately, it appears that the pandemic has slowed growth and pushed the breakeven point in schools for a few years.

Listen to Fifi Peters’ interview with the CEO of Curro on the group’s latest results:


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