Steep school fees

PSG’s private education play Curro Holdings has really run ahead of itself. At the PSG Group [JSE:PSG] AGM last Wednesday, Curro CEO Chris van der Merwe admitted management had expected the share to trade at around 500c on listing. At the time of writing Curro’s ordinary shares were bid at 650c and offered at 895c, with the nil paid letters (remember: Curro is raising fresh capital via a one-for-one rights issue) changing hands at between 200c and 235c. Basically, that means Curro is holding an inferred post rights offer price of anything between 425c and 550c.

At this point we might argue that if punters are so enamoured with private education they may as well buy into AdvTech – a quality contender that isn’t commanding as demanding an earnings multiple as Curro. However, Curro is more exciting, in that it envisages strong expansion through a private education model that offers affordable schooling to the sprawling middle class market.

Still, expansionary plans take time before they materialise at bottom line and Curro really has to be viewed as a long-term play. Early results will be modest. Financial 2011 should see gross profits of around R13m and earnings of 0,7c/share. By 2013 turnover should reach R300m, with gross profits of R59m and earnings of 16c/share.

For those still holding earnings multiples up as a standard measure of value, Curro is very expensive at current levels. But the long-term vision (notwithstanding many is the slip twixt cup and lip) is rather compelling. By 2020 there should be (conservatively speaking, I think) 40 Curro schools and 45 000 pupils that generate after-tax profit of R450m.

For those who have already bought Curro, HOLD. For those contemplating an investment it may be prudent to HOLD OFF until the froth blows off. If you can’t resist then maybe Paladin (which still holds a big chunk of Curro) is a more affordable alternative.