THE FINANCE GHOST: Why Stadio is in a class of its own

Once upon a time, tertiary education specialist Stadio was part of private schools business Curro Holdings. This means the companies have historically been a popular topic of debate, with the classic spin-off trade in the limelight. Growth investors tend to prefer the newly listed asset that gets most of the attention, whereas value investors look for outperformance in the rump — the piece left behind. In this case, the growth investors graduated with flying colours and the value investors are stuck in matric. It doesn’t always work that way, which is why digging into the reasons for this is important.

The performance gap over five years is astonishing as Curro needed to raise capital to get through the pandemic. The last thing you ever want to do is raise equity capital in a depressed market. Curro is barely up over five years, while Stadio is up 540%. Even the recent performance that isn’t affected by the rights issue reflects a vast difference. Over 12 months, Stadio is up 75% and Curro down 20%. On a year-to-date basis, Stadio is up 25% and Curro down 30%. Whichever way you cut it, the market loves the Stadio story and wants nothing to do with Curro.

The temptation is to assume that the gap will close and that Curro will start outperforming. As these companies don’t compete with each other, these aren’t charts that trade on a relative basis. It’s not like comparing two banks (for example Nedbank and Absa) and trading the differential in the price/book ratio. Were it not for the historical bond between Stadio and Curro, I doubt we would ever have seen this comparison — and I don’t think we will for much longer.

The obvious difference is that Curro is focused on education from preschool to high school, whereas Stadio is a tertiary education business. Now think about this in the context of the world around you, especially what’s happening in your peer group and what you see when the hospital groups release results and talk about maternity cases.

There are fewer children around these days, particularly in higher-income homes that would be Curro customers. To compound this global trend, many families have emigrated from South Africa in the past decade.

Conversely, Stadio’s tertiary business is focused on adults who either need their first qualification or must reskill themselves to respond to disruption.

Though there’s an argument to be made that today’s birth rate headache for Curro is tomorrow’s headache for Stadio when there will be fewer young adults, we are a long way from that. There are also mitigating factors: adults are increasingly pursuing lifelong learning, and one would hope that over time, more adults will have access to education opportunities than before. The stronger fundamentals lie with Stadio.

Now think about the way in which each business addresses demand. For Curro to work, it needs to invest a fortune in large school campuses with facilities parents would expect to see at a private school. This requires a lot of capex and creates a serious challenge if the school doesn’t achieve the expected student numbers, as there’s a huge fixed-cost burden. In this regard, Curro has airline economics — it’s the last few bums on seats that make all the profit.

Stadio’s distance learning business has historically been its focus, which means a variable cost structure that has less operating leverage and steadier margins. The construction of the Durbanville campus will be watched carefully by the market, as Stadio will need to achieve return on capital metrics deserving of the premium valuation on the share price.

It would be wrong not to mention AdvTech in this discussion. With a business model that is a hybrid of Stadio and Curro, it’s not a surprise that its share price performance is in the middle: 340% over five years, 13% over 12 months and -5% year to date. Notably, Stadio has even pulled away from AdvTech in recent times, putting it in a class of its own.

Now on an earnings multiple of almost 28, it’s hard to see how the Stadio multiple can move any higher on a sustainable basis. Luckily for investors, the underlying fundamentals are strong so that even if the multiple stays where it is, earnings growth should deliver decent returns. The risk is that the multiple might take a knock, in which case the dip buying is likely to begin. If there’s one thing the local market adores, it’s a South African growth story.