Chantal Marx & Khumo Manne
The ADvTECH group was founded in 1978 and is one of South Africa's leading private education providers and a continental leader in quality education, training, skills development and placement. The company runs a multi-brand portfolio across three main divisions being Schools, Tertiary and Resourcing.
Schools and Tertiary makes up the bulk of the group's revenue and profits. Currently the company operates 118 schools and 33 tertiary campuses in South Africa with a growing presence in other selected African countries.
Competitive advantage and capacity in SA Schools
ADvTECH places substantial emphasis on academic excellence, sports, culture, and parent involvement. Academic excellence is proven (100% matric pass rate, 93% bachelor passes, 100% A-level student international university admission) and ensured by leveraging its 160-person-strong Central Academic Team. This team designs and reviews all qualifications and curricula, develops and integrates technology and processes that enhance teaching and learning, run educational and leadership development programmes, and conducts and publishes research.
The company also utilises artificial intelligence (AI) tools in two main ways.
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ADvLEARN is a customised AI platform that provides personalised learning paths. The system covers maths and science and tracks student's homework and usage, providing immediate teacher feedback. The system also generates real time dashboards providing insights into teaching and learning effectiveness.
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Map growth - Tracks performance across all schools and benchmarks it against international peers. The system provides adaptive assessments in maths and English, highlighting student's gaps and strengths, and then utilising this information to create personalised learning paths to close the gaps.
We still see substantial upside from a margin perspective, with cost savings emanating from continued share services transfer - particularly in procurement and account management. Furthermore, schools' capacity utilisation is currently at 83% and when considering expansion plans for specific schools it is still low at 68%. Fuller schools lead to higher margins.
Tertiary scope for growth is substantial
In South Africa, private higher education enrolments have more than tripled since 2010. The sector is currently growing at between 6% and 7% per annum, with significant growth tailwinds such as:
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South Africa is still experiencing population growth.
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The middle- to higher-income household cohort is expected to grow, and these are the households that can afford university education for their children.
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Currently, the public tertiary sector is constrained with limited resources to expand. To meet the Department of Higher Education and Training's goals for enrolments by 2030, private sector capacity in tertiary education must approximately triple by then.
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Distance learning programmes have grown in popularity because of its convenience, accessibility, and relatively lower cost. These programmes are also easily scalable at a much lower cost than for contact learning.
Africa expansion that could have legs
ADvTECH has ambitions of growing its international enrolments from 11 300 to 62 300 over the next ten years. This implies a compounded annual growth rate (CAGR) of 18.6% per year.
There is substantial and growing demand for high quality private education across the continent, supported by population growth, an expansion of the middle class, urbanisation, and economic growth. There is limited competition in this space - particularly considering the groups' quality of facilities and superior academic outcomes.
The company plans to leverage its centralised services to lower the cost of developing and running schools and tertiary educations outside of the country and is already has educational institution in four carefully selected geographies being Kenya, Ethiopia, Ghana and Botswana. These countries are fast growing, and English is widely spoken. Recent expansions include:
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The acquisition of Flipper International School in Addis Ababa, Ethiopia, for ~R135.6 million. The group utilised internal funding for this acquisition, which added five schools and over 3 000 students to its international portfolio.
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Setting up a Rosebank International University College in Ghana, with strong support from the Ghanaian government in response to high and growing demand for tertiary education in the country.
Financials in focus
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Recent revenue and earnings momentum has been strong, underpinned by solid enrolment growth and operating efficiency gains. We expect this to persist over our forecast horizon, with revenue anticipated to grow 10% per annual (CAGR), and operating profit to grow at 16% per annum over the same period.
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Net debt to EBITDA stood at 0.6 times at the last reporting date, well below its internal limit (2.75 times) and lender covenants (3.25 times). The company is planning to regear its balance sheet - with several expansionary activities currently ongoing, including the development of the new Varsity College campus in Sandton.
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Return on invested capital (ROIC) has been consistently above the company's weighted average cost of capital (WACC) over time. Cost of capital is set to decline near term, while returns are anticipated to improve further.
Investment case summary
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Key competitive advantage in schools is a focus on personalisation while centralising costs. There is a big emphasis on academic emphasis, sports, culture, and parent involvement as well as substantial flexibility in subject choices.
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Schools will benefit long term from growth in the middle- and high-income markets in South Africa and could enjoy short-term tailwinds from improved consumer and business sentiment and easier macroeconomic conditions.
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In tertiary education, there is a significant and growing shortfall in the supply of government universities that is expected to fuel long-term growth. Short term, demand may be supported by an improvement in consumer and business sentiment, easing macros and the potential recognition as a "university", which is currently reserved for state institutions only.
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The African expansion opportunity is significant. The private schooling market is underpenetrated and highly fragmented thus there are good opportunities for organic and acquisitive growth longer term. Similarly, there is significant demand for quality private tertiary education in most markets. The team has so far taken a measured approach, however, and while their ten-year targets are ambitious - we would expect them to continue to follow a detailed and selective approach in this area.
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The company's revenue and profit growth prospects are strong, complemented by a healthy balance sheet.
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Management has a history of extracting value from the business and the business has superior return metrics relative to listed peers.
Risks
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In both Schools and Tertiary, the long-term underperformance of the SA economy has dragged in the past and even impacted enrolments outside of affordability constraints, i.e. emigration.
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The company has a new management team with the new CEO Geoff White only having been in the role since March this year and a new CFO stepping up to the plate early next year. While there has been stability so far, there is a risk that a significant strategy shift could upend the current growth trajectory and balance sheet strength.
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The company will be gearing up near term, which could drag on profitability as expansion opportunities take a while to mature.
Valuation
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The company is currently trading on a forward PE of ~16.5 times, which seems high relative to history, but with good, consistent growth to come. Our discounted cash flow model values the company at R43, suggesting ~30% upside from current levels.
