Advtech : INVESTING IN EDUCATION - ARE INDEPENDENT SCHOOLS THE ANSWER?

Independent schools may just hold the answers - coupled with sound investment opportunities - to not only meeting increasing demand, but also to offering efficiently managed alternatives.

Globally, governments allocate roughly 16% of annual revenue to education compared to South Africa's 20%. This points to a skewed cost structure rather than the actual amount spent on education, as many critics assume. A recent paper by the International Monetary Fund echoed these findings, highlighting staff compensation as one reason for the South African government's dismal delivery on its education investment.

These and other ongoing issues with the South African public education system have strengthened the case, and opportunities, for independent schools in the country. These schools are offering quality education for children and, on average, are also managed more efficiently than their public counterparts. Coupled with the low penetration of independent schools in SA compared to other countries, the introduction and funding of more independent schools in the country may be one way to meet the education challenge.

Latest data points showed that the market share of independent schools in developing markets was around 14%, which is in stark contrast to SA's 4%. This disparity between SA and other developing markets is even larger in secondary education. There is a void to be filled.

Private education companies address the critical education issue in South Africa, which is an important investment consideration, given growing investor awareness of environmental social and governance (ESG) considerations in the investment process. Investors globally are growing more conscious of the need to combine generating returns with doing greater social good. Therefore the social virtue of supporting the operation of a business that educates learners cannot be overstated.

EDUCATION AS INVESTMENT

One such investment opportunity my team and I have identified is that of ADvTECH, a leading provider of private education, training and staff placement services in Africa. Its offering includes primary, secondary, tertiary schooling, as well as a job placement business. This means that the company can be involved in a child's education from their first day at nursery school and all the way throughout their working career.

From an investment perspective, we typically like businesses with some diversification and ADvTECH has a differentiated offering from a stage of life perspective. The company also meets this criteria by owning multiple differentiated brands, including the well-known Abbotts College, Varsity College, Rosebank College, Trinity House and Crawford schools.

The business model is simple but effective. Once a school is built in a good location and the cost structure is right, it becomes a case of bums on seats. The operational leverage is high, and after a school breaks even additional enrolments fall through to the profit line. The model is also highly cash generative. Fees are paid at the start of the month, quarter or year, and bad debts tend to be very low. Moreover, learners tend to be at a school for many years resulting in an annuity revenue stream with an expectation of some escalation every year, which all makes for a good business model.

The company's foray into the education sector dates back to the mid-90s and I believe that this is why the business has such a good understanding of the sector. One cannot underestimate the expertise required to operate across Africa in such an important sector. ADvTECH proves that it has the expertise time and again when picking new school sites, building new schools on time and within budget but also when identifying acquisition targets.

ADvTECH has always been known for its high-end independent schools but has increased its focus on the mid-fee market segment as the tough economic environment has seen South African families move abroad and competitors offer independent schools at fees comparable to model-C schools.

The company recently completed a significant investment drive, acquiring close to 50 schools in four years, essentially doubling the size of their schools division. With these investments done and an expected improvement on the economic front, we expect improved shareholder returns. Furthermore, the group has a growing number of schools in the mid-fee sector under the brand name Pinnacle Colleges, which has been reporting strong growth. This hedges the group to some extent against the current difficult economic environment.

Given economic growth rates across the African continent and the challenge to educate the growing African population, investing in education that spans across the continent is becoming vital. Investments into the rest of Africa has also served to diversify the company's assets. They have invested in the likes of Zambia (university) and Kenya (Crawford school in Nairobi/Makini brand of schools), and over time we expect increased contribution to profitability from rest of Africa.