Once again I pose the question: Is private education specialist Curro Holdings growing its earnings fast enough to justify its heady market rating? Last week Curro, which is controlled by adventurous investment house PSG Group, issued a trading statement covering the half-year to end-June — disclosing an earnings range of 21.2c to 22.7c/share.
That means the interim earnings will be between 46% and 56% higher than the 14.5c chalked up in the previous financial year. Going on profit performances for the past three financial years, it seems sensible to double Curro’s interim earnings to make a reasonable forecast for the full year.
I’d suggest Curro shareholders would be disappointed if the company did not post 45c/share at bottom line for the year to end-December 2016. But let’s be generous and assume Curro actually posts 50c/share — remembering Curro’s Ebitda margin has shifted from 14% in 2012 to 21% in 2015 as more of its self-developed schools start shifting up the J-curve. That would put Curro on a forward earnings multiple of around 83 times compared with the trailing earnings multiple of around 130 times. It’s still a helluva demanding rating — which I frequently remind my educationally inclined wife, who is an enthusiastic shareholder in both AdvTech and Curro.
Don’t get me wrong. I think Curro is a fantastic business, and there’s no denying that CEO Chris van der Merwe (whose inspired presentation I thoroughly enjoyed at the recent AGM) is a man on a mission. It’s the market valuation that I can’t get my mind around. To justify earnings multiples of more than 80 times, Curro — to my mind — has to increase earnings by at least 50% every year until 2020.
That would mean earnings of 75c/share in 2017, 112.5c in 2018, 168.75c in 2019 and 253c in 2020. The four-year forward earnings multiple on the ruling share price would then be a more palatable 18 times. But this does assume a steep earnings trajectory, and factors in a perfect operating scenario — no development setbacks, no regulatory hitches, no lapses in the land banking effort, no slack admissions at newer schools, no disappointing performances from acquired schools and no brand damage.
To date, it’s tough to fault Curro. Brand strength is growing, it has willing backers (so much so that there’s been a sizeable rights issue every year since listing), land banking initiatives look reassuring, cash flow is growing and the compound annual growth rate in earnings is a nifty 58%. The bottom line is there is a lot of value being stored in Curro’s 22c/share earnings.
It’s an academic exercise, I know. But by way of comparison one of my beloved small caps, security technology group Amalgamated Electronic Corp (Amecor) — which also occupies one of the few sweet spots in the dour local economy — issued a trading update with similar earnings to Curro last week.
Amecor is expected to report earnings of around 20.6c/share for the six months to end-September — which is up 30% on the comparative interim period last year. The steady-rather-than sexy Amecor trades on a dismissive historic earnings multiple of eight times, and I’d reckon a forward earnings multiple for Amecor — still trading under a cautionary — would probably be closer to six-and-a-half times. At these ratings, the alarm siren sounds so much more appealing than the clang of school bells. We’ll see ...