Strategic investment unlikely to dampen returns
Tinashe Hofisi
#themes: expansion, mix change, returns
ADH delivered a positive 1H25 performance, driven by relatively strong operational leverage in its RoA and SA schools. Gains in the tertiary segment, however, were tempered by significant ongoing investments in expansion, new programs and IT infrastructure. We believe that this investment phase will likely constrain near-term margin growth as these projects ramp up. In our view, ADH’s investment case remains strong, underpinned by a proven history of value-accretive investments and a stable board despite recent management changes. Management intends to maintain prudent capital allocation, while prioritising growth in affordable brands (Pinnacle, Rosebank, Makini) over premium offerings (Crawford, Trinity, Varsity College). While no new school openings are scheduled for FY26E, from FY27E, ADH plans to accelerate openings to at least 2 schools annually in SA and 1 in RoA. Unlike Curro’s past aggressive rollout, ADH’s strategy is supported by rigorous feasibility studies and clear brand differentiation, in our view, underpinning returns. As a result of these investments, we estimate capex to average at least R1.1bn (9–10% of revenue vs. prior SBGSe: 6–8%, including maintenance capex of c. R700 -750m per year) over the medium term.
SA schools: Steady performance across brands, mix effects limit margin upside. 1H25A revenue was up 11% y/y (1H24A: +9% y/y) with all brands showing enrolment growth. Operating margins were up 30bps to 20.6%, potentially limited by lower revenue mix as ADH’s opened two Pinnacle College schools (Raslouw + Roodepoort - lower tuition than Crawford and Trinity) over the past two years. Both schools are performing in line with expectations.
RoA schools deliver strong growth and margin expansion, driven by demand and strategic acquisitions. 1H25A revenue was up +31% y/y (+15% ex-Flipper), while margins expanded 70bps to 29.4% as most schools approached capacity. This supports recent investment, including the R172m acquisition of Regis Runda (2,000-student capacity) in the upmarket Runda suburb. The school will integrate into Makini (Cambridge curriculum, 20% fee premium), offering margin upside. We view the deal as attractively priced versus building a new 1,500-student Pinnacle school in SA (R250m).
Tertiary performance constrained by mix effects and investment drag. 1H25A revenue was +13% y/y, trailing enrolment growth of 14% due to a negative mix impact (4.8–5%) from higher growth at lower-tuition institutions such as Rosebank College and contact learning. Operating margin edged up only 10bps y/y to 25.9%, further pressured by costs from recent investments. The launch of Rosebank University International College (RUIC) in Ghana (Aug 2025) weighed on margins by 40bps over 1H25A, with a similar impact expected in 2H25E. RUIC has capacity for 1,500 students, targeting 300–400 enrolments in its first year and aims to break even within three years.
We maintain our fair value range between R39–R42, implying a total return of 21%–31%, including a 4.1% dividend yield. We forecast diluted NEPS of 238cps in FY25E (prior: +245cps) and 266cps in FY26E (prior: 277cps), factoring in: (i) Capex to rise in FY25E and ramp up post-FY27E, (ii) limited near-term tertiary margin upside impacted by a greater mix of lower-fee institutions, and (iii) slower Resourcing growth in FY25E due to USAID withdrawal impacting 10% of the client base (NGOs and charity organisations). Risks include financial leavers, emigration, shortage of quality teachers and management transition.
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