“The education sector is interesting as it’s one of the few sectors in South Africa showing very strong fundamental growth, almost independent of general economic growth,” says Rory Ord, head of unlisted investments at 27four Investment Managers.
“Education is highly demanded across all sectors of South African society, and this ties into a global trend of increasingly educated populations.”
Demand creates an opportunity for the private sector
There are two major themes in education that make it interesting from an investment perspective.
“First, it’s clear that government cannot meet the demand for the different levels of education required by South Africans, and neither can it meet the standards required on a very large scale,” says Rory.
He adds that beyond the top performing government schools and universities, the population using these services want better education and many are willing and able to pay for it. This has created an opportunity for the private sector, which has experienced huge growth in private schools, to the benefit of companies like Curro and ADvTECH.
“Both companies have grown strongly in recent years, with Curro achieving higher percentage growth off a lower base. Curro has been highly valued by investors who have been willing to pay for the expected growth. ADvTECH is a bit more mature as a business, but has still delivered growth of 20%+, and on a much lower earnings multiple. Private education is still a small percentage of the whole, so expect more growth, but it does take time to deliver this growth in large numbers,” advises Rory.
The investment opportunity of education technology
“The second theme,” Rory says, “is how technology can increase the penetration of quality education. In essence, the way education is delivered has not changed with the advent of technology, but there are many areas where change is possible.
“The best example of this in South Africa is GetSmarter, which partners with global brand universities to provide high quality online short courses. Founded in Cape Town, this business was acquired by 2U, a US based company doing similar things in 2017, for R1,4 billion.
“Technology also promises more focused learning by tracking the progress of each student and adapting to make sure no child is left behind. We expect plenty of disruption and change in this part of the market.”
What’s next for education?
In the unlisted space, Milpark Business School was bought out by private equity buyers several years ago and has recently been purchased by Stadio, Curro’s tertiary education spinout and Brimstone Investment Company. A third theme is consolidation. Scale is important in education and established players with capital are likely to continue purchasing smaller players to achieve this.
What the education sector looks like today
The education sector is divided into three separate investment and business opportunities, namely: High income schools, low income schools and franchises. Before investing in any of these sectors you’ll need to understand them.
Low income schools
Low-fee or independent schools are growing at a rapid rate in South Africa. In its 2015 report, Low-Fee Private Schools: International Experience and South African Realities, the Centre for Development and Enterprise (CDE), reports that low-fee private schools that charge annual school fees of less than R12 000, are educating an estimated 250 000 learners. The schools fill in the education gap left by insufficient or dysfunctional public schools in disadvantaged communities.
“The private education sector is not well researched or understood,” says Jane Hofmeyr, policy and advocacy director at the CDE. “But there is considerable potential with new players, local and international, coming into the market, looking for opportunities in South Africa and Africa.”
The growth in the independent school industry emanates from for-profit and not-for-profit chains of private schools at all fee levels. The main source of income for low-fee independnt schools is school fees, government subsidies and donations.
Investors in this sector face a number of challenges. A convoluted regulatory environment can impede the establishment of new schools. You’ll also face high compliance costs, and more accountability with severe sanctions for non-compliance. Further challenges are acquiring affordable premises, high teacher turnover and late or non-payment of school fees.
High income schools
ADvTECH, a listed private education provider, reported a 22% rise in revenue to R2 billion for the first half of 2017. Operating profits grew by 28% to R344 million, while earnings climbed 6% to 38,6 cents per share, and a dividend of 15 cents per share was declared. ADvTECH’s schools division comprises 90 schools across 47 campuses under the following brands: Abbots College, ADvTECH Academies, Centurus Colleges, Crawford Schools, Junior Colleges, Maravest Group and Trinityhouse.
There are also challenges in this sector: “The difficult economic climate and unsettled socio-political environment had a more significant effect on enrolment numbers than had been anticipated. We have seen a consistent rise in the number of families emigrating and this trend had a negative effect on enrolled numbers as we lose students in grades where it is difficult to replace,” says ADvTECH. “In addition, we have seen an increase in withdrawals and exclusions as a result of financial pressures. Therefore, while actual new enrolments have been in line with expectations, net student numbers have been adversely affected by these two negative influences.”
These factors, along with costs of investments in greenfield projects and school expansions, are constraining profits.
Education franchises continue to grow and spread across South Africa, fulfilling parent’s needs to invest in their children’s early learning and critical skills development through enjoyable, educational programmes.
BIG DEALS IN THE EDUCATION SPACE IN 2017
SOLD FOR R1,4 BILLION
2U, a Nasdaq-listed technology education business acquired Cape Town start-up GetSmarter for R1,4 billion. GetSmarter was founded by brothers Sam and Rob Paddock. The education business focuses on developing online short courses in partnership with higher education institutions, including Cambridge University, Harvard University, the Massachusetts Institute of Technology and the Universities of Cape Town, Witwatersrand and Stellenbosch (Business School).
Both companies focus on delivering “high-quality, high-touch digital higher education from world-class colleges and universities,” said 2U in a statement.
Milpark Business School
SOLD FOR R320 MILLION
Milpark Business School was sold to Stadio, in partnership with Brimstone, for R320 million. Brimstone will pay R96 million for a 30% stake, and Stadio will pay R224 million for a 70% stake in Milpark Business School. Stadio, which falls under the Curro umbrella, says this acquisition is just the beginning; it intends to acquire several additional programmes, including degrees, higher certificated and diplomas.
Yusuf Karadia sold Mancosa to UK private equity firm Actis, two decades after he launched the distance learning school to teach South Africans business skills. Mancosa is now a part of Actis’s expanding African higher education portfolio. Since 2014, it has spent R3.65 billion investing in educational institutes across the continent.
CURRENT OPPORTUNITIES IN THE MARKET
- Investment: R200 000 to R300 000
- Contact: +27 (0)82 785 7763/ +27 (0)21 939 6344
- Visit: www.minds.co.za
Innovatus FET College
- Investment: R700 000 to R1 million
- Contact: +27 (0)32 541 0045/6
- Visit: innovatus.co.za
Kumon Education South Africa
MiniChess South Africa
- Investment: R350 000
- Contact: +27 (0)87 287 4038/ +27 (0)82 442 6267
- Visit: www.younge.co.za