Investors go gaga for private schools

Making money out of low-cost private education is a sure-fire winner, you'd think.

The investment case for private schools was bolstered this week when the government revealed that the pass rate for public schools was 75.8%, with only 28.3% of matriculants quali-fying for university entrance. By contrast, private schools boasted a 98.3% pass rate and 85.4% of their matriculants had university exemption.

The two JSE-listed education companies - Curro, which is partly owned by Jannie Mouton's PSG, and Advtech, which owns the Crawford range of schools - have ridden the wave of dissatisfaction with government schools. Both have a serious war chest for investment, and plenty of confidence in their business model.

But which is a hotter investment prospect?

Curro has been all the rage in recent years. Its share price has shot up 120% in the past three years (compared to 49% gain of the wider JSE all share index) as it has opened low-cost private schools; it now has 41 schools and 37000 pupils.

Advtech, despite having been around longer, had looked pretty poor by comparison, seemingly out of ideas as it held on to its higher-fee Crawford and less expensive Trinity Colleges, without doing much to expand. Advtech's stock reflect this lull: it was up only 46% over the past three years, less than the gains of the JSE over that time.

But with new CEO Leslie Maasdorp at the helm, the Advtech tortoise has put on a serious burst of a speed, snapping up schools and even expanding across the border.

This new energy meant that last year alone Advtech increased its pupil numbers by 70% to 32000.

However, Advtech's spending spree hasn't been enough to push Vunani Securities analyst Anthony Clark to rate it as a "buy". Clark, who owns both of the JSE-listed education stocks, rates Advtech as a "hold" and Curro as a "buy".

"When the ducks are quacking, throw them some bread," he said of Curro.

In a note to clients this week, Clark rates Curro as one of his five "must-have stocks for 2015", saying its share price could climb to R38 per share - 28% above its current levels.

"I believe 2015/16 could be the year the market recognises [its] potential.

"By 2016, the business model becomes self-funding and could start paying cash dividends," he says.

One of the reasons he likes Curro is that its margins are improving, as school fees are increasing by 10%, yet its costs are growing by only 8%.

But Curro is a hard sell for value investors, who tend to balk at its terrifying price-to-earnings ratio of 175 - more than 10 times more expensive than the rest of the JSE. Adv-tech might not have the same growth trajectory, but it is trading on a far saner price-to-equity ratio of around 21.

Still, investors keep ploughing in, emboldened by the fact that Mouton's PSG, which holds 58% of Curro, is betting on steep growth.

It has grown from three schools in 2009 to 41, and it's ahead of schedule on its promise of 80 schools by 2020 . Last year, it opened seven new schools - some with 100% pupil capacity from the outset.

CEO Chris van der Merwe said this week that Curro would add another 10 schools this year. Profits, which the company is finally beginning to generate, are simply reinvested to add more assets to its swelling base.

Advtech has suffered badly by comparison - but Maasdorp wants to change that.

It is moving to feed the "growing pie" of low-cost schooling demand, and he says it plans to invest R3-billion in the sector over the next decade.

And he has put his money where his mouth is, buying the Maravest Group for R450-million in November, bolstering Advtech's private school portfolio by 32%, and adding more than 4400 pupils from nursery to high schools at six sites.

Two of Maravest's schools are low-fee and five of the six are established operations.

Investors weren't bowled over by the deal; Advtech's share price dropped 23c to R9.01. But over the year, it did rise 35% from R6.57 to R8.71, peaking at R9.66 in September.

Maasdorp clearly has a lot of work to do to turn the sentiment.

Safety-conscious investors know that when they buy Adv-tech, they're taking on debt and have to deal with the dilutionary impact of new share issues to buy new schools, which could take up to four years to translate into bottom-line profits.

A bet on either company is likely to be a long-term play.

But short of a monstrous black swan event, the education industry is logically a sure thing.