Grading South African school stocks

The South African private education sector offers investors a range of opportunities to choose from, with three main JSE-listed stocks dominating the field: AdvTech, Curro, and Stadio. Each of these companies has a unique business model that sets them apart in the industry. Curro, known for its focus on private primary and secondary schools, has faced challenges in recent years due to underwhelming learner numbers. The company has had to rely on higher school fees to drive revenue, highlighting the struggle to reach capacity in its schools. Once considered a market darling a decade ago, Curro has since experienced slower growth, with a mere 0.5% increase in learner numbers in the first half of the year. The struggle to fill schools is compounded by external factors such as immigration trends, further hindering their growth prospects. On the other hand, AdvTech has emerged as a top performer in the market, with a strong focus on higher-income South African and African markets. The company boasts impressive operating margins, particularly in their schools across Africa, showcasing their pricing power and demand for premium education. Additionally, AdvTech's blend of schooling and tertiary education, along with a unique African education offshoot, sets them apart in the sector. Meanwhile, Stadio, a tertiary education business with a significant online learning division, has shown substantial growth but is trading at a high PE multiple, raising concerns about overvaluation. Despite a strong balance sheet and strategic initiatives, such as property investments and a diverse learner base, the company's high valuation poses a risk for investors seeking substantial returns. When comparing the share price performance of these companies over the past year, AdvTech leads the pack with a remarkable 55% return, followed by Curro at 33%, and Stadio at 11.5%. However, a longer-term analysis reveals a different story, with AdvTech and Stadio significantly outperforming Curro over the past five years. The disparity in performance can be attributed to the pandemic's impact on brick-and-mortar operations, with Curro facing challenges that more capital-light models like AdvTech have overcome. The decision between investing in AdvTech or Curro ultimately depends on risk tolerance and growth expectations. AdvTech presents a lower-risk option with a solid business model catering to higher-income demographics. On the other hand, Curro may offer potential upside if interest rates decrease and economic conditions improve in South Africa. With a focus on affordability and a diverse consumer base, Curro could be well-positioned to benefit from a positive economic outlook. Stadio, while showing promise, raises concerns about its high valuation and shift towards property investments, which may impact future growth prospects. In conclusion, investors in the South African education sector have a range of options to consider, each with its unique strengths and challenges. Whether gravitating towards AdvTech for stability, Curro for growth potential, or evaluating Stadio's risk-reward proposition, a careful analysis of each stock's business model and market position is essential for making informed investment decisions.