Full marks for Curro's growth strategy

16 August 2015 - 02:00 By BRENDAN PEACOCK

Curro Holdings' results for the six months to June have gone so much according to plan that its share price moved barely a percent when the figures came out on Thursday. Headline earnings, headline earnings per share and revenue all increased substantially - but entirely in line with the goals that management of the independent schools company have for 2020.CEO Chris van der Merwe said the company aimed to enrol 90000 - or 0.72% - of South Africa's 12.5million school-age children by 2020."For us to attain that target we have to develop seven campuses a year. We've done that for the past four years and it's absolutely within our capacity to carry on with that trend."He said that for the past three years, Curro had been banking land to ensure it had enough sites for the next two years on which to put schools.story_article_left1With such a detailed programme, the failure of a bid for smaller rival Advtech last month had not derailed any plans, he said."I don't want to take my focus off our aim for 80 campuses by 2020. What was great was that [majority shareholder] PSG did the negotiating with Advtech while I and my operations team could focus on campus development."We're not down in the dumps. We have enough opportunities to attain our vision, and though we're disappointed, it didn't take our eye off the ball," he said.Van der Merwe described the support Curro gets from majority shareholder PSG as "absolutely magnificent"."They spend many hours in our offices because they have high expectations and are absolutely committed to seeing us through to 2020."Curro's business model has been refined to the point of generating positive earnings before tax when its schools are just 25% full."Our whole business model is based on starting a school with about 200 to 300 kids, which would break even after three years and be at 75% capacity after seven."Lately this is going faster, because we have examples of schools starting with 1000 kids on day one. It's going according to plan and better," Van der Merwe said.Curro is also investing heavily in teacher training colleges, with an entity near Johannesburg to be built soon, to add to Embury Institute for Teacher Education in KwaZulu-Natal."We've put effort, time and capital into designing a distance-learning programme to keep the concept affordable. The country needs it, so I'm positive about the future potential of the concept," he said.Keith McLachlan, fund manager at investment advisers AlphaWealth, said theory and reality rarely aligned as perfectly as in Curro's case.story_article_right2"Down to the last student, earnings before tax, all was what I expected."I think the share is trading at fair value."McLachlan said the majority of Curro's portfolio was still at the bottom of the capacity J-curve, which meant the company would ramp up quickly: so its current price-to-earnings ratio of 120 was almost meaningless.Although McLachlan did not rate Curro as a buy at this price, Michael Treherne, portfolio manager at Vestact, said earnings would grow into the share price, which was in line with Curro's growth, and that there would still be gains for shareholders."It's not cheap to start schools. Also, regarding the share price, it's not the most liquid stock. People who want to hold it probably already do."Treherne noted Curro's expanding margins as capacity came online and costs were spread across more pupils."Whenever they reach a point where they can't build more schools because of lack of demand or space, they'll pay off debt quickly because of the massive cash flow and be left with a big remaining dividend yield."Even if the stock only does 10% from now, it doubles every seven years and you get a great dividend yield for the future," Treherne said.peacockb@sundaytimes.co.za..

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