schools division. After years of
an overly conservative approach,
its management seems to have
realised that it needs to step up. It
made a bold statement of intent
with an initial R1.7bn capital outlay.
Over and above that the group is
now parading a R3bn war chest.
About R1.5bn of this five-year
investment plan has already been
authorised for expenditure by
the board.
This investment programme will
not only help Advtech catch up
with its closest rival, Curro, but
will also result in a quantum leap
in its scale as well as in earnings.
The first phase of the investment
plan has already bolstered the
group’s capacity by 75% to 35,000
students. The second phase is
projected to add capacity for 24,000
students in the schools division,
bringing the total capacity close to
60,000 students.
While this falls short of Curro’s
target of 90 000 students, we find
Advtech’s story more attractive
and sustainable.
About two thirds of the planned
additional capacity in the schools
division is going to come from
expansion of existing campuses.
This reduces the risk of overpaying
for acquisitions of new schools
while ensuring management
retains reasonable control of the
expansion programme.
What the market also seems to be
overlooking is the “baked in” growth
potential that Advtech offers.
Through organic investments made
over the past few years the group
is now sitting on 31% (about 11
000 students) unutilised capacity at
its schools. Margins are bound to
expand significantly when the group
start reaping the benefits of scale as
pupils fill up this expanded capacity.
Early indications are that this will
20
ISSUE 6 – SEPTEMBER 2015
be achieved because schools are
already reaching capacity in the
lower grades.
The benefits are already
materialising with the recently
released results showing that all
of the 29% growth in earnings
was organic.
The schools division also has the
support of the tertiary division,
whose profits are also on the rise.
Operating profit almost grew 51%
and the operating margin has also
expanded nicely. Management
attributes the growth to the
restructuring exercise and strong
growth in enrolment.
RISKS
Despite the attractiveness of
Advtech‘s growth ambition, it is
not without pitfalls. Implementing
a strategy of this magnitude will
require the allocation of significant
funds. With the group’s shares
looking undervalued it is more likely
that management will opt for debt
financing rather than share issues.
If it goes that route it will put more
pressure on its balance sheet, which
is already highly geared with a debt
to equity ratio of 132%. Interest
charges will also rise, which will
offset the earnings contribution
from the new investments.
If the group raises funds
through share issues it will have
dilutive effects.
So whichever financing option
it takes, there will be pressure
on earnings. Largely because of
that we expect short- to mediumterm earnings growth to be
organically driven.
Overall, we think the group’s
growth targets are achievable. It is
a profitable, mature business with
excellent cash-generating abilities.
We strongly believe the market is
underestimating its future earnings
growth potential and as such it
might be highly rewarding to buy
its shares.
Bull factors
Established brands backed by the
perception of a quality education
offering give significant pricing
power in the private education
arena.
Strong cash-generative
business model to support
investment p