Stadio Holdings: Patience may be key element
While way off its listing highs, tertiary education specialist Stadio may still be expensive if its ambitions don’t pay off
There appears to be a degree of uncertainty over the ambitious expansion plans by PSG-controlled private tertiary education provider Stadio Holdings.
That may sound illogical, since Stadio’s shares are trading on a p:e multiple of nearly 41 times and a forward multiple of around 25 times — which would normally indicate that the market believes its strategy is capable of generating very rapid earnings growth.
But this rating, though rich, is modest when compared to the early development days at Curro Holdings, the private schools business that unbundled and separately listed Stadio in 2017.
Curro, which subjected shareholders to a regular series of capital-raising exercises, was tagged with earnings multiples of as high as 150 times with excitable punters lapping up the ambitious schools expansion programme.
Stadio did have a promising start, with its share price racing to over 800c when it listed.
At the time, sentiment was buoyed by two main factors. The first was a strong belief that former Curro CEO and founder Chris van der Merwe could replicate his private schools success at tertiary level as CEO of Stadio.
The second was that there was solid evidence that the private tertiary sector was tapping a viable niche, given the impressive profits chalked up by the more conservative private education conglomerate, AdvTech, through its brands, including Varsity College and Rosebank College.
Stadio’s shares have since slumped to their present levels of 316c a share, notwithstanding its clearly defined short-and longer-term goals.
Curro excited the market by having to repeatedly upwardly revise its targets, and Stadio will probably look to do the same.
So far Van der Merwe has delivered on Stadio’s initial promises with a handful of acquisitions — the most significant being Milpark — and by enrolling almost 30,000 students at the end of 2018.
The (very attainable) short-term target is 35,000 students with the medium-term number of 56,000 students by 2026 and more than 100,000 over the longer term.
These are big numbers — but the fast-changing tertiary education segment provides a compelling supply-and-demand story.
In 2000 there were 557,000 enrolments at SA universities. By 2016 this number had grown to over 1.1-million, of which burgeoning private tertiary institutions accounted for 167,408 students, or roughly 15%.
With public universities bursting to accommodate the rush of first-year students, the massive overspill should logically wend its way to the private institutions. In 2016 more than 440,000 matrics qualified with a university pass, but fewer than 200,000 secured places at institutions of higher learning. With SA predicted to accommodate 1.6-million students by 2030, this is a problem that will compound annually, and private tertiary facilities that have built reputable brands should benefit.
This should be a sweet scenario for Stadio. Why, then, the seeming reluctance by investors to back the fledgling venture with the same vigour as an early-stage Curro?
It might be that Curro’s development milestones were easier to track. Every six months the market could assess the number of schools, watch the more established properties shifting through the profit Jcurve and, most importantly, watch the brand being systematically built.
In Stadio’s case the assessment of brand strength and profit progress will be more difficult, because so much depends on the company’s "multiversity" concept gaining rapid traction.
Stadio’s multiversity is essentially the creation of the full-fledged private university that offers students both a physical campus and distance-learning experience.
There were suggestions after last week’s Stadio AGM that the development plans for multiversity campuses were being accelerated. This was after Van der Merwe indicated that a Gauteng campus would be completed by early 2021 — the same date as the original timeframe for the Western Cape multiversity campus near Durbanville in Cape Town.
But there is a story behind this. An objection to the construction of the Durbanville multiversity threatened to delay developments. Well aware of the need to deliver on what was promised to the market, Stadio opted to accelerate development for its Gauteng multiversity.
The objection to the Durbanville development has since fallen away. Now, by default, Stadio will be bringing two multiversity campuses to market at roughly the same time.
There is still some caginess around the Gauteng development, with Van der Merwe only willing to identify the site of the proposed multiversity as "somewhere between Sandton and Pretoria". He adds that while the board is considering the Gauteng venture, a final decision must still be taken.
There are some regulatory hurdles to cross too: Stadio needs to register the multiversity as a private higher education institute with the department of higher education. The migration of degrees to the multiversity also needs a green light from the Council on Higher Education.
Van der Merwe believes building a single multiversity brand will have considerable advantages. "We will become better known and established with the general public as it is easier to market a single brand. Having three comprehensive campuses plus 14 buildings means we can easily accommodate more than 100,000 students with relatively low capital expenditure."
Based on an initial R400m cost estimate for the Durbanville campus, the FM reckons the cost of these two developments could be between R750m and R1bn.
Van der Merwe is adamant that there will be no need to come to the market for fresh funding — a key differentiator from Curro’s cash-hungry early development phase.
Not everyone shares this view.
Independent small-cap analyst Anthony Clark says: "At the current share price, bouncing off its 52-week lows, the majority shareholder PSG Group, with 44%, and directors (9%) would be reluctant to see a dilutive rights issue at such low levels. I do foresee at least one sizeable rights issue on Stadio’s horizon — perhaps R500m — but that may still be a couple of years away."
As for fears over delays, Van der Merwe is quick to point out that much development experience has been garnered from Curro’s largely undisrupted schools rollout over the past eight years.
But the multiversity campuses are mega-developments — and much larger than any of Curro’s school projects. Van der Merwe says, though, that the multiversity developments can be undertaken in phases.
The lead-up to the opening of the multiversity campuses, and the pending confirmation of a third such development in KwaZulu-Natal, might mean investors having to exercise some patience before seeing real evidence of the kind of resounding earnings growth needed to justify a demanding share price.