Curro Holdings

Update on the schooling stock at 887 cents following a recent site visit & recent news on stock

I've covered private education counter Curro Holdings since before the stock was even listed.

For those with long memories, Curro was an investment inside PSG Groups (then) listed private equity vehicle Paladin Capital.

PSG got involved in Curro in one of its best deals acquiring a 50% stake in the small schooling business for R50 million. At its peak, that stake was worth R10 billion. That valuation didn't last long. 

Curro was initially listed on the JSE Alt-X exchange and had a rights issue at the time of listing to raise R332 million partially underwritten by PSG at 400 cents. Five further rights issues followed with the last in August 2020 to raise R1,5 billion at 802 cents to bail the company out from a crushing debt pile. 

On listing, Curro traded at 790 cents and at its peaked in late-December 2015 at 5000-cents. Its PE was an eyewatering 1000x for a point as investors lapped up what seemed to be extraordinary growth promised by the company.

PSG bought out Paladin Capital & unbundled to its shareholders its stake in Curro Holdings in a scheme announced in July 2011. That was how PSG Group (directly) ended up with its Curro stake. A stake that had reached 64% by the time of the PSG Group unbundling in September 2022. 

Again, it may interest many that Naspers used to own a stake in Curro but after their stint investing in Educor (that was sold off and exited) they decided to sell their stake in Curro.and PSG got it. 

The current and now departing CEO knew the education sector well having been at Naspers Educor division. Andries Greyling has been at Curro for 15-years and in 2017 was anointed as the new CEO after the founder of the company Dr Chris van der Merwe decided to step down as CEO.

At Curro, Greyling has held posts as Chief Financial Officer (CFO), Chief Operating Officer (COO) and since 2017 Chief Executive Officer (CEO).

Dr Chis started what is now Curro from a single class of children in a rented room of a church in Durbanville near 25 years ago. 

Today, Curro has some 230 education points in 80 campuses throughout South Africa covering 71,000 learners, Curro is the largest private education schooling stock in South Africa and has a current share price of 887 cents and a market capitalisation of R5,2 billion (as I said at one time it was R20 billion). More on this fall from grace later.

Curro was an aggressive growth stock. This was done via the rapid construction of new schools supplemented by on-going acquisitions of independent schools. All of this was mostly funded by rights issues (usually one every year or two) as well as debt. 

However, as the schools estate grew and returns did not materialise as fast as investors anticipated, the wheels fell off the Curro bus in spectacular fashion.

From a high of near-5000 cents in late 2015, Curro slid for five years to hit 462 cents during the Covid sell-off in March and April 2022.

What didnt help was the fact that management had stated to the market that after five rights issues there would be no further calls on shareholders. 

However, in August 2020 a sixth rights issue to raise R1,5 billion at 802 cents was declared that left the market shellshocked. With an escalating debt pile of R3,5 billion and the trials and costs of COVID hitting the company, they were between a rock and a hard place. 

PSG Group underwrote the rights but the market was unimpressed and 14% of the issue was left with PSG that took its stake in Curro to 64% of 380 million shares. It was this stake that was unbundled in September 2022. 

Curro also had a tertiary education division, a side-shoot to keep learners in the corporate system as they progressed through the schooling network. Curro hoped to retain them post matric into a private tertiary offering named Stadio.

Stadio grew through a number of bolt-on acquisitions starting with Embury a specialist in providing education qualifications to teachers. They also own the high-fee AFDA film school and the business education specialist Milpark. Mostly an online education platform, Stadio services over 38,000 learners and has been a success since its separation from Curro and is self-funding and asset light due to its online profile. 

Stadio is now a listed JSE business having unbundled from Curro Holdings in a one share for one share deal in late-2017. The stock at listing soared to 850 cents and crashed during the COVID market sell-off to 76 cents. Today it trades at 395 cents with a market capitalisation of R3,4 billion. PSG had a 43% stake in Stadio and upon its unbundling exited 25% and kept the balance in its unlisted vehicle. 

Give the spectacular fall from grace of the Curro share price the institutional market has been wary of Curro for some years, hence the de-rating and sell-off. With PSG Group owning such a large stake, liquidity was always tight and that exacerbated the issue.

Curro, from its illustrious start and prospects of growth, missed several growth targets and as problems mounted initially with losses at a small schooling offshoot called Meridian then slower and lower growth from an ever expanding but half-filled school network, the market simply ran out of patience and Curro.

At the time of its early creation, I was aware that the budget for growth was set to see Curro make earnings north of 200-cents per share by 2020. Earnings never came that close with HEPS only attaining 60.1 cents per share in 2018 and slumping thereafter to 50 cents in 2019, 38 cents in 2020 and recovering to 40.9 cents in 2021. A far cry from its initial projections.

CEO Greyling in results meetings admitted that Curro has expanded too quickly, put down far too many schools and too much property which was simply not being fully utilised. That was the legacy he inherited upon his CEO tenure in 2017 as the strategy of previous management and supported by PSG saw the school estate and learners grow but profits stagnate.

With COVID hitting the schooling sector hard in 2020 and the associated re-engineering needed during the pandemic, a slew of problems came. A tough consumer environment saw some parents unable to meet school fees. Bad and doubtful debts rose leading to provisions. Excess property also saw provisions made and lower fees from ancillary services (bus fees, after care, boarders) also hit Curro.

Curro had to make some tough decisions and thousands of learners had to leave the system so that Curro could equalise its bad debt situation. However, intake of new learners continued and the book is ow far healthier as the non-payers have left leaving a much more resilient financial structure. Curro at a recent site meeting was confident its current 71,000 learner base could expand to 80,000 within 3-years.

As part of the evolution to past mistakes, Greyling curtailed growth, especially greenfield, and also pared back on acquisitions (unless they were bargain basement and/or added a new catchment area for growth). Curro aimed to cut costs and better utilise the estate to fill its existing classrooms where the extra child (put simply) became a much higher profit add.

Interim results to June 2022 saw the benefits of the work Greyling and his team have undertaken over the past two years with interim HEPS rising 41% to 27.5 cents per share. I have a forecast of 53 cents for FY2022. 

I anticipate growth coming in 2023 onwards as Curro reached its capex peak (R3 billion needs to be spent over the coming two to three years to add more high school capacity) and thereafter annual capex which was running at over R1 billion per annum, will trim back to maintenance capital of R400 million to R600 million per annum.

Greyling stated that debt would remain at R3 billion but as the company grew it would naturally de-leverage and excess cash would be paid back to shareholders in higher dividends, something that should have started in 2020 but didnt. I have written that Curro has had three to four missing years. 

The management changes that were announced last week came as a surprise. I was on a Curro site visit last Tuesday November 1st with the team and all was happy families with no inkling that the day after CEO Greyling would be announcing his retirement and that current CFO Cobus Loubser would become CEO.

Greyling is 52 years old and I do not believe there was anything untoward in the retirement to pursue other interests with no material issue causing such a sudden announcement. 

Personally, I find the move an odd one. 

After many years of rightsizing and streamlining the inherited over-ambitious expansion of past management as well as the PSG directed growth strategy which caused the earnings misses as well as the leap in debt that necessitated a sixth rights issue in August 2020, Greyling will not be around to glory at the recovery in earnings and the renewed growth in the stock he set in place. 

However, the market took the news in a sanguine fashion with Curro falling 3.2% on the JSE SENS.

The current CFO has a strong background having started with Curro at the start of 2020 replacing former CFO Bernard van der Linde who moved to another post within Curro.

Loubser was CEO of Long4Life's Sport and Recreation division, which included Sportsmans Warehouse, and, before that, chief financial officer at Holdsport for 11 years. He is an accountant having worked for KPMG. 

As a technocrat, I believe Loubser will appeal to institutional investors who want a firm hand on the balance sheet and his cool composure will be a contrast to the past two CEOs more laid-back presentational style. 

Curro also announced that its executive for corporate services and the group company secretary, Mari Lategan, will be the company's new deputy CEO. She has been with Curro for six years. She previously founded a strategic business and communications consultancy firm and was a general manager at Media24.

I see the move appointing Loubser as CEO and Lategan as deputy-CEO as an interesting move and one that could benefit Curro (if) it works successfully. 

A school is a business but the clients are children and ultimately their paying parents. 

Managing the financial complexity of a large school business with 2021 revenues of R3,5 billion as well as the massive property estate needs the skills of an accountant. 

However, as important is the empathetic and social side of education where problems as they arise need to be quickly alleviated to mitigate any reputational risk to Curro.

Some may remember the isolated incident of racism at one Curro school that quickly caught the medias attention, despite it was one isolated case. Though one case is one too many. Lategan has that skill set. 

As I write this note Curro at 887 cents which is a year-to-date performance of -28.0% with the stock bottoming recently post the PSG liquidity event at 845-cents. Its 52-week high & low share price is 1450 cents & 810 cents. 

Post the site visit my recommendation on Curro Holdings as written in my research and the Financial Mail (see enclosed Google drive link to report) remains unchanged.

https://drive.google.com/file/d/1Wwwgch_Zy4pAQ2KXUkZ6PsdGhbqne9Ow/view?usp=share_link