Investors shrug off concerns over Curro

Curro investors are not afraid to back the rapidly expanding private education group as it pursues yet another rights offer.

It seems Curro's business case is compelling enough to make shareholders forget the cloud of a probe that the state will launch into private and independent schools over allegations of racism.

Even though Curro's shares seem heavily overpriced - its stock trades on a price-to-earnings ratio of 183, 10 times more expensive than the ratio of 17 for the JSE's All Share index - the big shareholders are ready to plough in another R740-million in April.

This week, Investec Asset Management, one of the three large institutional shareholders in Curro alongside Sanlam and the Public Investment Corporation, confirmed it will support the rights issue.

"We are a firm believer in Curro's aim to provide affordable quality education to South Africa's pupils, for which there is most certainly a need," said Investec portfolio manager Richard Middleton.

This belief in Curro's prospects stems from the fact that its share price has gained 30% in the past three months alone and grown at three times the pace of the JSE's All Share index in the past three years.

The new rights offer will work like this: Curro will offer existing shareholders the right to buy one share for every 11 they hold at a price of R25 a share - a discount of 23% on its R33.14 share price last Monday.

Curro will also raise another R700-million in debt.

This will bolster its war chest by R1.44-billion, giving it enough ammunition to expand as quickly as possible to meet an almost insatiable demand for private schools.

By the end of January, Curro owned 42 schools - nearly double the 22 schools it had in December 2012 - with 36 000 pupils.

Last month's intake of 8 750 was its biggest to date.

This means Curro is five years ahead of its initial plan, which was to open 40 schools by 2020. This target has now been revised to 80 schools by 2020.

Despite five rights issues since it listed in 2011, shareholders haven't flinched at the sky-high valuations - as much an indication of their faith in Curro's growth as a testament to the waning confidence in public schools.

In the middle of last year, Curro raised R600-million.

Bernardt van der Linde, Curro's financial director, said they were conscious that taking on debt, rather than issuing new shares, could place too much of a burden on the company.

Analysts say that after this rights issue, Curro may not need to dip into shareholders' pockets any time soon.

Bjorn Zietsman, an equity analyst at Avior Capital Markets, said Curro should be able to raise the R700-million in debt comfortably using its balance sheet, which will give it a debt-to-equity ratio of 50:50.

"By being aggressive with growth, [Curro] now stands to benefit from first-mover advantage. This is a capital-intensive industry, hence the rights issue," Zietsman added.

Curro may face competition from a revitalised Advtech, another JSE-listed education group that is embarking on a R3-billion expansion programme under new CEO Leslie Maasdorp.

Advtech, which runs the Crawford schools, wants to expand pupil numbers by 70%.

Curro CEO Chris van der Merwe said after this week's year-end results that his company wanted to invest about R600-million to expand existing campuses and develop three new Curro schools at Waterfall Estate in Johannesburg, Sitari in Somerset West and Hillcrest in Durban.

It also plans to expand its Meridian-branded school in Cosmo City in Johannesburg and build a site for another Meridian school in Pretoria.

Overall, Curro's revenue jumped 52% to R1-billion from R659-million a year ago, and its pre-tax earnings grew 41% to R79-million, while cash generated rose 133% to R247-million.

Van der Merwe said Curro could begin to pay a dividend in 2019.