Curro reported results for the six months ended 30 June 2020 (1H20) on 19 August which, on the face of it, were stronger than we had expected, with recurring HEPS increasing by 9% YoY. However, HEPS were down 23% YoY due to a once-off acquisition charge that was incurred during the period under review. Net revenue advanced 2.8% YoY, after accounting for the once-off fee discount, which Curro schools provided during the lockdown period, and a significant increase in bad debts, which jumped from R14mn in 1H19 to R82mn in 1H20. The biggest portion of these bad debts appear to have stemmed from the Group’s Meridian division, which recorded a loss for the period. Meridian focuses on lower-income households. Nevertheless, overall, the Curro brand performed admirably (especially considering the circumstances under which it was operating), with headline earnings rising by 22% YoY. School fees were increased by 15% YoY and learner numbers rose by 5% YoY. No interim dividend was declared.
Learner numbers were negatively impacted by the COVID-19 induced lockdown and the economic pressure on livelihoods that resulted from this. It was especially true for the company’s Nursery School segment, which is more of a discretionary spend. Learner numbers in this segment declined 4% from January to June 2020 and fell by 24% YoY. Meanwhile, Curro’s Primary School and High School segments’ numbers were relatively flat (-2% and -1% YoY, respectively). Curro managed to keep operating expenditure (which declined by 1% YoY) well under control during 1H20.
Looking ahead, Curro is warning that net revenue will not show much growth in 2H20, reflecting the decline in learner numbers, but added that this should be more than offset by the COVID-19 discount not recurring. According to Curro, it is impossible to predict where the bad debt number will settle for the full year (FY20). Since the gradual reopening of schools, the collection rate has improved significantly and exceeded the company’s expectations, but it is still not at the same level as pre-lockdown. Opex will also increase as the schools start to operate normally.
Curro announced a capital raise through a rights-issue earlier this year, which it believes should close in early September. The company says that the additional capital from the rights issue will be used to pay down debt. This should be positive for Curro’s net finance costs, which continue to creep up.
Usually, Curro is a very simplistic business and one can almost double the half-year performance to get a good sense of what it will achieve for the full year. However, as can be gleaned from our comments above, this is not the case for FY20. We expect 2H20 to be a far more difficult six months for Curro on a HEPS level due to the greater number of shares in issue, higher bad debts, and the higher operating costs. The Nursery School segment is also a very high-margin business so we expect the EBITDA margin to be under more pressure in 2H20.
We currently forecast recurring FY20 HEPS of R0.49 vs the R0.405 reported for this half – so HEPS of only R0.10 for the second half. This places Curro on a December 2020 forward PE of approximately 16.5x. In our view, this is a very attractive valuation for a company which is currently facing an extremely tough set of circumstances but is still operating in an industry with strong thematic tailwinds. We maintain a buy recommendation on the stock.