Strong core, resourcing the outlier
Tinashe Hofisi
#themes: operating leverage, resourcing, capacity
ADH delivered a decent 1H26 print, with strong operating leverage offsetting an acute decline in Resourcing. Group revenue increased 8% y/y (+13% ex-Resourcing), below our implied +11.7%, largely due to Resourcing (-15%). Operating profit rose 14%, expanding margins c.100bps to 22.0%, while dNEPS increased 16.3% to 130.8cps (implied 1H SBGSe: 133cps). We view 1H26 positively: the headline revenue print understates the strength of the core education businesses, where broad-based margin expansion and healthy enrolment trends continue to support operating leverage. Tertiary remains the key earnings engine, RoA offers attractive capacity-led upside, and targeted SA brownfields could support a recovery in school enrolment growth ahead of the next greenfield cycle. Debtor quality also remains healthy, with gross debtors up 5% versus education revenue growth of 13%, while fees in advance increased 8%, suggesting growth is not coming at the expense of credit quality. Given Resourcing's weaker growth and returns profile, we believe strategic optionality around the division could increasingly come into focus.
We marginally lowered FY26E/FY27E dNEPS to 272cps (+16.1% y/y)/315cps (+15.9% y/y) (prior: 275cps/316cps), reflecting the decline in Resourcing, modestly higher gearing, and a relatively higher gross tertiary revenue-mix impact than we expected, attributable to faster growth in Rosebank International and distance learning, where fees are c.one-third of Emeris. However, we raised our fair value range to R50 - R56 (prior: R41 - R44). We revised our capital structure assumptions to include lease liabilities, reflecting that c.75% of tertiary properties are leased, lowering our WACC to 12.1% (prior: 13.5%). We also raised our applied P/E and EV/EBITDA multiples to reflect sustained margin expansion, healthy ROIC and a visible capacity pipeline. The implied total return is 10%–20%, including a 3.6% DY. Key risks include financial leavers, slower enrolment growth in SA schools and resourcing weakness.
Tertiary remains the key growth engine, with mix dilution less margin dilutive than expected. Revenue/operating profit increased 17%/19% on 19% enrolment growth, while margins expanded 50bps to 26.4% despite RIUC Ghana start-up costs. Contact enrolments rose 17% and distance 34%, nearly doubling over two years. Rosebank International and Emeris generate broadly similar percentage margins, implying faster growth in lower-fee Rosebank/distance primarily dilutes revenue per student rather than margins. The revenue mix drag has narrowed to c.3-4% from prior guidance of 3-5%.
Schools delivered further operating leverage, but capacity increasingly shapes the growth outlook. SA Schools revenue rose 8%, supported by c.5.5-6% fee increases, c.1.4% enrolment growth and favourable grade mix, with margins up 30bps to 20.9%. Ahead of greenfield openings from FY28, ADH is adding c.2,500 seats across Pinnacle and Trinityhouse for FY27E, equivalent to c.1.5 schools of lower-risk brownfield capacity. Retention also improved, with mid-year leavers c.20% below prior-year levels. We believe these initiatives, alongside improved retention, could restore SA Schools enrolment growth towards c.3–5% in FY27E. In RoA, reported revenue/operating profit growth of 8%/11% understates underlying performance due to FX, with c.20-30% growth indicated on a constant-currency basis. At 93% utilisation, capacity rather than demand is increasingly the constraint.
CapEx is rising but returns remain the key discipline. ADH expects R1.0-1.5bn p.a. over the next three years (vs R700-900m p.a. over the past 3yrs), with >R2bn already committed across Emeris Durban (c.R800m), Rosebank capacity, selective school expansion and potential African M&A. While this may moderate cash generation through FY28E/FY29E, we believe the balance sheet remains supportive and ROIC is targeted at WACC + 6% (c.17-18%, >100bps FY23-25 levels), with tertiary projects higher. We see the investment cycle as supportive of medium-term growth, provided execution remains disciplined. Reinvestment remains the priority, while buybacks provide additional capital-allocation flexibility (1H26: R250m, c. 1.3% of market cap).
Read PDF