Tertiary Undersupply And Distance Learning Will Support Long Term Education Demand Narrative

Catalysts

About ADvTECH

ADvTECH is a diversified African education group focused on private schools, tertiary institutions and education resourcing services.

What are the underlying business or industry changes driving this perspective?

• Structural undersupply of quality tertiary seats in South Africa and key African markets, together with ADvTECH’s strong brands and broad qualification range, supports sustained enrollment growth that should continue to drive high single to low double digit revenue growth and operating leverage.
• Rapid expansion of distance and blended learning, supported by investment in digital platforms and contact centers, enables ADvTECH to scale capacity at lower marginal cost, which is likely to support margin resilience and faster growth in earnings.
• Rising urbanization and growth of the middle income cohort in markets like Kenya, Ethiopia and Ghana, combined with ADvTECH’s mid-fee and premium school formats, provides a long runway for Rest of Africa rollout that should support above group-average revenue growth and higher group margins.
• Ongoing investment in university-level capabilities, new degree programs and research output positions ADvTECH to capture share from public universities once university status is granted, which should support mix-enhanced fee growth and medium-term expansion in net margins and earnings.
• Disciplined capital allocation into high-demand campuses and value-accretive acquisitions, together with improving debtor management and strong cash generation, underpins reinvestment-led growth and supports compounding in normalized earnings per share.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming ADvTECH's revenue will grow by 11.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 13.3% today to 14.2% in 3 years time.
• Analysts expect earnings to reach ZAR 1.7 billion (and earnings per share of ZAR 2.95) by about December 2028, up from ZAR 1.2 billion today.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 20.5x on those 2028 earnings, up from 16.7x today. This future PE is lower than the current PE for the ZA Consumer Services industry at 35.9x.
• Analysts expect the number of shares outstanding to grow by 0.37% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 17.31%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The structural undersupply of quality tertiary places in South Africa and Ghana, together with ADvTECH’s accelerating investment in new campuses and degree programmes, could sustain double digit enrollment growth for many years. This would likely drive revenue and earnings materially higher than a flat share price implies and support expansion in net margins and normalized earnings per share.
• Rapid growth in distance and blended learning, combined with new contact centers and fully digital platforms, allows ADvTECH to add large numbers of lower cost students at relatively low marginal cost. Operating leverage from this scalable model could therefore push group operating margins and earnings above current market expectations and justify a higher share price.
• The roll out of mid fee and premium schools and universities across faster growing African markets such as Kenya, Ethiopia and Ghana, where teacher costs are about 20 percent lower and demand is strong, may keep Rest of Africa margins structurally above South Africa. This could lift group operating profit growth and long term revenue visibility beyond what a flat valuation would suggest.
• Progress toward university status in South Africa and the successful launch of Rosebank International University in Ghana, supported by a rapidly deepening pool of staff with masters and doctorates and strong research output, could enhance brand strength and pricing power. This may enable higher fee inflation and improved credit quality, which would support sustained growth in revenue and net earnings.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of ZAR39.66 for ADvTECH based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be ZAR12.2 billion, earnings will come to ZAR1.7 billion, and it would be trading on a PE ratio of 20.5x, assuming you use a discount rate of 17.3%.
  
• Given the current share price of ZAR36.1, the analyst price target of ZAR39.66 is 9.0% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.