Filling the Education Gap
Tinashe Hofisi
#themes: private education, resourcing
ADvTECH (ADH), founded in 1978, specialises in private education and placement. Its strategy hinges on three key pillars: building a strong faculty, leveraging technology, and achieving economies of scale. The group supports individuals throughout their essential learning and development stages with exposure to SA and Rest of Africa through its well-established brand portfolio, facilitating a premium market position.
Increasing demand for quality private education supports the Schools segment (45% of group EBITDA) as underinvestment impacts public schools’ appeal. Our analysis suggests that fiscal basic education expenditure as a percentage of GDP has declined by c. 90 bps since CY96 (CY22: 3.3%). This, in our view, has resulted in performance disparity between public and private learners. In CY21, the number of learners achieving a bachelor’s pass was three times higher in private relative to public schools. This, in our view, has and is likely to continue supporting estimated enrolment growth of c. 3% - 5% (SA: 3% - 5%, Rest of Africa: >5%) with ADH prioritising sustainable enrolment growth over fee increases, enhancing operating leverage. Moreover, in addition to new site opportunities in SA and Kenya, we believe there is substantial capacity utilisation headroom in the current portfolio, as only 5% to10% of ADH schools operate at 100% built capacity, with further upside to 100% ultimate capacity. We are encouraged by a growing middle class in the Rest of Africa, which in our view could support sustained enrolment growth. We therefore expect the Schools division to deliver a three-year topline CAGR (FY23A – FY26E) of c. 9.9% and margin expansion of c. 80 bps over the same period to 28.5%.
Capacity constraints in public universities underpin growth in Tertiary division (49% of group EBITDA). Enrolment caps set by the Minister of Higher Education and Training forces students with unsuccessful public placements towards private alternatives. Due to these limitations, c. 58% of Grade 12s eligible for higher education have not been able to secure a place in public institutions since 2010. Beyond capacity constraints, new sites and revamps, we expect topline growth (3-year CAGR: c. 10.5%) to be supported by (a) policy tailwinds providing university accreditation to qualifying private institutions; and (b) demand for training programmes fuelled by global opportunities (e.g., nursing and cruise liner tourism). We expect these vectors to aid margins, though sustained investment in quality enhancements could provide a marginal offset, resulting in c. 40 bps EBITDA expansion to FY26E from 25% in FY23A.
ADH productivity and efficiency rank highly relative to its peers. ADH’s revenue per student (USD), asset turnover, and school-built capacity utilisation (ADH: 83%, Curro: 70%, Ataa: 69%, and NCLE: 61%) leads, as EBITDA per student (USD) ranks second. ADH’s stable margins and return profile reinforce the operations defensive nature. ADH generates robust cash flow (CFO/NI: ADH: 2.3x, Curro: 2.4x, and Stadio: 1.9x), consistently maintaining a negative net working capital cycle, which we attribute to ADH receiving a higher proportion of fees in advance compared to peers. This, in our view, further supports ADH’s lower credit losses relative to peers despite holding historically conservative provisions.
We initiate coverage of ADH with a future value valuation range of R32 to R35, providing an estimated total return of 19% to 31%, including a 4% dividend yield. Spot is up c. 51% over the past 12 months, particularly outperforming peers since Feb 2024 - in our view supported by superior health of operations. We forecast FY24E and FY25E dNEPS of R1.96 (+13.3%) and R2.20 (+12.3%) respectively. Given ADH’s strong cash flow generation (CFO/NI: c. 2x) and low gearing levels (ND/EBITDA c. 0.6x), we believe management has the flexibility to either increase the dividend payout (FY23: 50% vs FY22: 42%) or implement a share buyback programme in the absence of attractive acquisitive opportunities over the medium term. Should school enrolment approach 100% built and ultimate capacity, our blue-sky scenario analysis suggests a potential value uplift in full capacity of c. R11 and R14 respectively, relative to our fair value range.
Risks: Emigration, reputational threat from Educor’s demise and ramp up in credit losses.
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