Investments | Curro - a secure compounder?

South African markets closed in the red yesterday, as market participants await US inflation data and the timing of interest-rate cuts.

Retailers, Pick ‘n Pay Stores, Foschini Group, SPAR Group and Shoprite Holdings dropped 4.3%, 2.4%, 2.2% and 1.6%, respectively. Property developers, Emira Property Fund, Resilient REIT, Redefine Properties and Attacq declined 2.4%, 2.1%, 1.9% and 1.7%, respectively.

Telecommunications companies, Telkom SA SOC and Vodacom Group shed 1.6% and 1.3%, respectively.

Pharmaceutical companies, Netcare and Aspen Pharmacare Holdings fell 1.1% and 0.6%, respectively. On the flipside, diversified miners, Pan African Resources, Exxaro Resources and Kumba Iron Ore advanced 2.7%, 2.2% and 1.5%, respectively.

The JSE All Share index declined 0.7% to close at 73,142.13.

Yesterday, the South African rand strengthened against the US dollar. The yield on benchmark government bonds fell yesterday. The yield on the 2030 bond declined to 10.20%, while that for the longer-dated 2040 issue fell to 12.49%.

At 05:30, the US dollar is trading 0.2% higher against the rand at R19.1293, while the euro is trading slightly higher at R20.716. At 05:30, the British pound has marginally gained against the rand to trade at R24.2261.

Market update by Anchor Capital

US markets ended mostly higher yesterday, ahead of the domestic economic data for further cues on rate cuts outlook.

Media and entertainment companies, Netflix, Warner Bros Discovery and Walt Disney advanced 2.4%, 1.8% and 1.6%, respectively. On the contrary, fast-food chain companies, Domino's Pizza, McDonald's Corporation and Wendy's dropped 2.8%, 1.1% and 0.5%, respectively.

Pharmaceutical company, UnitedHealth Group declined 2.3%, amid reports that the US Department of Justice launched an antitrust investigation into the company.

The S&P 500 index rose 0.2% to settle at 5,078.18, while the DJIA index declined 0.2% to close at 38,972.41. The NASDAQ index climbed 0.4% to end the trading session at 16,035.30.

The UK market finished weaker yesterday, weighed down by losses in consumer staples stocks. Tobacco company, Imperial Brands dropped 4.8%, amid reports that British Finance Minister, Jeremy Hunt might announce a new UK tax on vapes as part of his budget next week.

Chemicals company, Croda International declined 3.2%, after the company issued dismal profit outlook for FY24, amid weaker demand.

Consumer goods company, Unilever and Reckitt Benckiser Group fell 2.0% and 0.6%, respectively. On the other hand, miners, Antofagasta, Rio Tinto and Glencore advanced 1.4%, 0.9% and 0.8%, respectively.

Banking firms, HSBC Holdings, Standard Chartered and Lloyds Banking Group gained 1.1%, 1.0% and 0.9%, respectively.

The FTSE 100 index marginally declined to close at 7,683.02.

Asian markets are trading mostly lower this morning. In Japan, chemicals company, Mitsui Chemicals has declined 2.0%. On the flipside, chemical company, Sumitomo Chemical has advanced 2.5%.

In Hong Kong, pharmaceutical company, CSPC Pharmaceutical has shed 2.4%. On the other hand, automobile company, Li Auto has gained 1.7%.

In South Korea, dental equipment company, Dentium has jumped 6.6%. On the contrary, automobile company, KR Motors has dropped 6.4%.

The Nikkei 225 index is trading 0.1% lower at 39,191.99. The Hang Seng index is trading 0.9% lower at 16,644.21, while the Kospi index is trading 0.6% higher at 2,642.36.

At 05:30 today, Brent prices fell 0.5% to trade at $83.2/bl. Yesterday, Brent prices rose 1.4% to settle at $83.65/bl, on expectations that the OPEC+ would consider extending voluntary oil output cuts into the second quarter. Meanwhile, the American Petroleum Institute (API) reported that the US crude oil inventories rose by 8.43mn bls in the week ended 23 February 2024.

At 05:30 today, gold prices marginally advanced to trade at $2,030.33/oz. Yesterday, gold declined 0.1% to close at $2,029.64/oz. Yesterday, copper rose 0.3% to close at $8,396.40/mt. Aluminium closed 0.7% higher at $2,199.69/mt.

Market update by Anchor Capital

Anchor Capital's investment team:

The potential growth algorithm for Curro has long appeared attractive, and in its early days as a listed company, investors paid a significant premium for this. However, Curro has struggled to deliver the elusive J-curve.

With the benefit of hindsight, its past expansion strategy was too aggressive and poorly executed (too many junior and pre-schools) considering the poor economic backdrop that followed.

Covid-19, not its fault obviously, was another frustrating setback for the group, pushing it into a panicky rights issue at a particularly dark hour for its long-suffering shareholders. That was a final straw for many of its shareholders, who threw in the towel and punished the share severely in the process.

Yet the tide appears to be turning. A new, more professional management team has steadied the ship.

Learning from past mistakes, investing in line with demand (more orientated to high schools) and focusing on filling past excess capacity heralds a season of robust growth, with Curro positioned to capitalise on the SA demand for quality private education. This shift suggests a maturation in Curro's strategic approach, one that promises to align future growth with the sturdy foundation it has built over the past decade.

This graph below provides a compelling narrative on Curro's momentum in the high school segment, illustrating the expansion potential based on student progression from Grade 8 to Grade 12. In 2023, Curro reported a significant intake of 6 928 Grade 8 students, a foundational year for high school education.

This figure is juxtaposed against the 4 241 students currently in Grade 12, surpassing the 2 479 figure from 2019, showing a robust enrolment growth over four years.

The following chart shows Curro's strategic infrastructure development over 15 years, separated into two phases.

Phase 1, from 2009 to 2019, is characterised by an aggressive expansion strategy, as evidenced by the number of schools either acquired (in orange) or developed (in blue). The transition to Phase 2, which commenced in 2020, marks a shift in strategy from aggressive construction and acquisition to a more measured approach.

Here, the focus is on optimising the use of the existing infrastructure and digital enhancement, aiming to maximise the value of the investment in the newly created capacity.

The declining numbers in the chart from 2020 onwards indicate a deliberate deceleration in physical expansion as Curro pivots to enriching the quality of its educational offerings through digital technology.

Recent results have demonstrated that the earnings flywheel that proved elusive for so long is finally working. Thanks to its more measured investment plans, free cash generation is set to improve strongly.

Although the share has rerated somewhat as recent results have restored confidence in its execution, currently on a 12-month rolled forward PE of 14 times, we believe Curro is a secure compounder, with earnings projected to grow at around 25% per annum over the next two years.

Chart of the day

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