Curro needs the kids to come back to school

The latest results from Curro Holdings show that the Covid-19 pandemic hit PSG Group’s attempts to bring better schooling to the average family – normal hard-working people who are disappointed with government schools – extremely hard.

The schools are growing and attracting more scholars, but costs are rising faster than income.

In addition, a lot of families just couldn’t afford to pay school fees when their employers cut their working hours, or they lost their jobs.

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

Earnings before interest, tax, depreciation and amortisation (Ebitda) declined 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.

Headline earnings and headline earnings per share (EPS) decreased nearly 28% from R160 million to R116 million and by 49% from 37.9 cents to 19.4 cents respectively.

Summary of interim results to June 30, 2021
(Rm)	2021	2020	% change	12m Dec 2020
Revenue	1 784	1 590	12.2%	3 094
Ebitda	390	466	-16.3%	686
Earnings	161	30	437%	-108
Headline EPS	19.4c	39.7c	-49%	36.4c
Dividend per share	0c	0c	–	10.04c
Share price	R 11.75
12-month high	R 12.61
12-month low	R 7.69
Price-earnings ratio	65

Source: Curro Holdings interim results, JSE market data

While earnings increased by more than 400%, headline EPS declined due to the huge dilution when Curro had to force a rights issue on its shareholders towards the end of the 2020 financial year. The number of shares in issue increased from 412 million to 598 million.

Costs increase fast

It is immediately noticeable from the income statement that costs are increasing faster than income.

During the six months under review, revenue increased by just more than 12% from R1.59 billion to R1.78 billion. Average learner numbers increased by 7.2%, from 61 746 to 66 167 at the end of the first half of the financial year.

While management lauded the increase in revenue and student numbers, employee costs increased by 30% and other expenses by 23%. The other expenses include the write-off of unpaid fees.

Bad debt and discounts

Curro CEO Andries Greyling notes that the levels of bad debt and fee discounts were higher than those the company experienced in the previous year, which were also higher than before to the pandemic.

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

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

Greyling says the non-performing portion of the debtors book mainly relates to learners who have left Curro, adding that concerted efforts are being made to recover these and the situation has improved. “The quality and ageing of outstanding accounts for enrolled learners improved during the first half of this year.”

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

The balance sheet discloses that debt is still high, despite the R1.5 billion rights issue less than a year ago. In fact, the cash flow statement shows that the full R1.5 billion went to repaying debt, and more. Curro settled more than R2 billion of its debt then.

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 R1.5 billion capital injection.

Not good

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

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

“It takes time to build a new school and to reach capacity. They are basically expanding one grade at a time, adding a new class every year as learners move from one grade to the next.

“Newer schools needs several years to fill and reach break-even.

“But even considering this, the more mature schools full of learners are not achieving the returns investors hoped for,” says McLachlan.

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

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

Over-optimistic

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

The success of adding schools and children on school benches saw the share steadily rising to a high of more than R57. Investors were obviously thrilled that PSG has worked its magic and found another winner.

But the profits didn’t follow, and it has been downhill for shareholders since then.

The share hit a low of only R4.85 in March 2020 during the Covid-19 crash. It has since recovered to R11.75.

This presents an conundrum. Already some 80% lower than its record high, the latest figures put the share on a demanding price-earnings (PE) ratio of nearly 70 times based on the headline earnings for the latest 12 months.

While management points out that earnings will accrue more evenly in the current year, the latest results would indicate a forward PE of not much below 30 times. This indicates that shareholders continue to hope for strong growth from what still looks like a good business opportunity.

“The primary objective for Curro remains to increase capacity utilisation of its existing facilities,” says Greyling.

Unfortunately, it looks like the pandemic has slowed the growth and delayed break-even in the schools by a few years.

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