Paying school fees

SOME COMMENTATORS expressed disappointment at private education and resourcing group AdvTech’s interim performance, which reflected a 3% dip in operating profit. In truth, very little market misgiving was reflected in AdvTech’s share price – which, in a way, is a pity, because opportunities to buy this quality stock on the cheap don’t come often.

Perhaps some market segments can be forgiven for registering disappointment. AdvTech – with strong annuity flows on the education side – has been a classy performer over recent years. But AdvTech’s profit performance needs to be contextualised. A number of other top second line counters (Massmart, Distell, etc) also recently reported bottom line pressure. The underlying message may be that current trading conditions really do make it impossible to grow earnings but that strategies remain sound for the long term.

The best shareholders can hope for is for the company to pull through this tough period with trading margins, cash flow and its balance sheet intact, plus a half decent dividend policy.

At the heart of AdvTech’s profit crimp was the revenue/costs ratio – a balancing act it has got right more times than wrong over recent years. Simply put: the enrolling of new students and securing of revenue streams in recessionary conditions didn’t fully match the rollout of new infrastructure. Rental costs increased 18% and depreciation and amortisation by 19%. Still, AdvTech confidently opted to hike its interim payout – which suggests directors don’t doubt the sturdiness of the company’s business model.

And there’s comfort in AdvTech’s operating cash flow before capital expenditure (which stretched to R235m) and its stout balance sheet (cash on hand R118m, and well-managed debtors book).

Perhaps the most important indicator of things that lie ahead is the company’s fees in advance increased to R273m (last year: R229m) – which, directors remind us, can be considered a positive indicator about cash flows and revenues.

Accumulate on price weakness.