Faith restored to Curro's high growth

Curro's Chris van der Merwe says expects to build seven private schools a year and may own more than 80 schools by 2020

Curro - which is on target to operate 80 schools by 2020 - rose by 4% on the JSE following a 76% gain in its bottom line to 9c a share.

This followed more than a fortnight of share price weakness. Curro is one of the most expensive shares on the JSE, trading on a demanding historic earnings multiple of about 200 times.

Wayne McCurrie, Senior Portfolio Manager at Momentum Asset Management, reckoned Curro was not that different to media conglomerate Naspers. "In a high earnings multiple scenario you have to believe in the growth story," he said.

He argued that Curro's market rating seemed justified based on the large jump in interim earnings. "The growth is off a low base, but if you assume earnings are doubling each year, then the valuation is not that unrealistic," he added.

In terms of sustaining growth, there is also some reassurance to be taken from the improving quality of Curro's earnings measured by the conversion of profit into cash. In the interim period, net operating cash flow came in at R87m (or 29c/share), more than matching earnings before interest and tax of R69m.

Strong cash flow, strong future growth

Curro's Chief Executive Chris van der Merwe said stronger operational cash flows as well as existing bond and loan facilities were sufficient to fund the company's growth initiatives for the foreseeable future. Curro - which has held several rights issues to raise new capital since listing in 2011 - is building 10 new schools this financial year, and has pencilled in an average of seven schools a year until 2020.

Van der Merwe said it was possible that Curro, which will have 43 schools at the start of next year, could surpass its official target of 80 schools by 2020.

"Officially, we'll stick with the original target. But if we build 10 schools a year we will go past 80 schools, so there might come a time when we have to reconsider our targets," he said.

McCurrie believed that Curro was on a strong growth footing even though competition was inevitable in affordable private education.

"Every time it becomes clear there is a high growth niche, it tends to attract new entrants. Believe me, competitors will come and eventually slow Curro's growth and restrict their margins. Although Curro - which has got a head start on potential competitors - is probably safe for a couple of years yet," he added.

But more sceptical market commentators still question the market's optimistic rating, pointing out that as a fast-expanding entity there is development risk.

One commentator, who asked not be named, said that while no-one could dispute that Curro was well positioned in a very sweet spot in education, it would be challenging to keep growing at a pace that justified the current market rating.

"Doubling earnings off a low base is one thing but doing it every year might get more difficult, especially when annual earnings move up to between 40c and 50c a share," the unnamed commentator said.

Source: Business Day via I-Net Bridge