Our opinion on the current state of COH

Curro, a leading private education group in South Africa, focuses on establishing and managing schools for children up to matriculation. Following the unbundling of its tertiary division, which became Stadio and was listed separately on the Johannesburg Stock Exchange (JSE) on 3rd October 2017, Curro has capitalized on the declining quality of government education since 1994. Originating as a spin-off from PSG, which, after a rights issue in September 2020, now holds almost 60% of Curro, the company has seen significant growth. On 30th December 2015, Curro achieved one of the highest price-to-earnings (P:E) ratios ever recorded on the JSE at 245, largely due to its potential for unlimited expansion through acquiring or constructing more schools. Currently, Curro operates 178 schools across 76 campuses, serving an average of over 72,800 students.

However, the company has faced challenges, including declining pupil numbers and financial pressures on parents affecting their ability to pay school fees. Consequently, Curro has had to impair the value of its schools by R202 million and increase its bad debts provision. Notably, on 12th May 2021, Curro expanded its portfolio by acquiring HerronBridge College in Fourways, which has 1,260 learners. Additionally, in June 2021, Curro launched its online school, Curro Online, now catering to 750 pupils.

In a strategic move, PSG announced on 1st March 2022 that it would unbundle its 63.6% holding in Curro, distributing it among PSG shareholders to unlock value. Curro has also successfully challenged the City of Johannesburg in court to prevent schools from being classified as businesses for rate purposes, winning the case on 2nd March 2023.

For the six months ending 30th June 2023, Curro reported a 16% increase in revenue and a 26% rise in headline earnings per share (HEPS), driven by growth in learner numbers, annual fee increases, and a significant boost in ancillary revenue. The company also managed to reduce the discounts granted on tuition fees. Looking forward, Curro anticipates a HEPS increase of between 14.1% and 23.8% for the year ending 31st December 2023, although it expects to recognize impairments of between R340 million and R380 million (net of tax) related to lower-yielding school assets.

Despite the stagnant share performance since the onset of COVID-19 in March 2020, Curro is now exhibiting signs of an emerging upward trend. The education sector remains an attractive investment area, as it often benefits from advance payments for tuition, resulting in lower working capital requirements. However, the industry is capital intensive, with significant infrastructure needed for each school's operation.