Curro results underscore growing segment of economy

I covered Curro at the end of last year when they announced a R185 million acquisition of Woodhill College. target="_blank">Here is a reminder -> . These guys released full year results yesterday plus an announcement for a rights issue which the market had been guesstimating for a while now. When we look at these results it must be noted that these guys do not make any money yet. It is a growth story hence the capital raising. The strategy involves both growing schools organically and by acquisition. Both of these require huge capex.

Let's look at the numbers. Revenue grew by 125% (33% of this was organic) to R166 million while learners increased by 80% to 9308 within their 15 schools (up from 9). Management expect 2012 to be a massive year and hope to own 28 schools by the end of the year. In terms of earnings the company actually made a loss of R7.5 million for the year. This was because of interest expenses due to their massive capital expansion over the last 2 years.

So how do we value this company? The current market cap sits at R1.6bn which means the company trades on 10 times revenue. Margins last year when interest expenses weren't so high came in at 17.4%. This is very basic but let's assume the company doubles revenues this year (it's planning on doubling its schools) to R320 million. Let's assume they maintain last year's margins (which they won't as they plan to carry on expanding) which means they'll make around R55 million. That puts them on a forward EBITDA valuation of 29. Property plant and equipment is valued at R529 million (a third of the market cap), so at least we have that sort of underpin.

These calculations are just to give you a perspective and do not include the effects of the rights issue. The company is not going to be about earnings for the next 5 years. It's going to be about growing schools and number of learners. The macro fundamentals are certainly there. The inefficiencies of public education are wildly publicised. Education sits as an absolute priority for most parents in a middle class home. Why I like Curro over its competitor Advtech is that they are targeting both high end and low end income groups. Their school fees are 30% lower than the private school average which means they fall within the grasp of new comers into our growing middle class.

A lot is riding with management and their decisions going forward. They are looking to raise R350 million by issuing over 58 million new Curro shares at a subscription price of R6, a 48% discount to the 30 day average price. It must be noted that the board made this decision in November last year when the stock was a lot cheaper. I still rate this company even though it may look expensive. I think there is a huge gap in the market for cheap private education (they are first movers in this sector) and that there are numerous options for acquisitions. If you are willing to ride the wave I think it is a compelling buy.