Jannie Mouton’s aggressively expanding education business Curro must be the bane of Advtech CEO Frank Thompson’s life. Investors
inevitable compare the two private education companies against each other. Advtech, the more established player, generated revenue if R881m and taxed profit of R72m in the six months to end June. Curro is much smaller – revenue of R308m and taxed profit under R15m. Yet at their current share prices, investors value Curro, at R5.8bn; Advtech at R2.8bn. I got the opportunity today to talk about this with Advtech’s CEO, a thoroughly decent man who I’ve known for years. Aren’t you just a tad irritated by the market’s relative valuation I asked? Twice. His response in the transcript of our interview (below) gives some insight into why his business double the size and five times the profit, is worth under half of Curro. Right now the market wants growth, even if it’s only promised. Rather than slow and steady. Make up your own mind who will win this modern day Hare and Tortoise race. – AHÂ
To watch the video of my interview with Frank Thompson on CNBC Africa, click here.
ALEC HOGG: Joining us as we unpack Advtech’s numbers for the half year to end June is company Chief Executive, Frank Thompson. Well Frank, its ‘steady as she goes’. I was looking at your share price. If you go back to 2010 when it was R4.00 a share – it’s just under R7.00 a share now, so nice appreciation; 16% in the last year. Revenue is up 4%. Operating profit is 9%. A solid business.
FRANK THOMPSON: ‘Steady as she goes’ is the correct word, I think. If you unpack it there’s some interesting features that we’re quite pleased about, but ‘steady as she goes’ sums it up.
ALEC HOGG: And that’s really where we need to focus our attention. You and I have spoken a lot over the years. Since the emergence of Curro, the market’s attention on Advtech’s been perhaps more focused . Curro’s innovative entrepreneurial business approach has been shooting the lights out – the share price through the ceiling. You are very similar to them – same area. Have they maybe injected you with some new enthusiasm?
FRANK THOMPSON: Well, they’ve certainly changed the dynamic in the Independent Education Sector; a lot more attention, a lot more hype and a lot more noise. I think Advtech, over a long period of time, has attracted the investments – not really the attention – the investments of a large number of stable and keen shareholders who appreciate the long-term nature of the investment and our message.
ALEC HOGG: But it does look like you’re changing a little. In the last six months you’re going to put another R230m into capex (capital expenditure) . You’ve got a total  budget (R1.2bn) which is roughly half your market cap.
FRANK THOMPSON: Well again, that’s been a long story built up over the last five or six years and this is really just more of the same; a steady and consistent acceleration of our investment pattern. Nothing new. Nothing changed.
ALEC HOGG: How about the competitive element that Curro has brought to the marketplace?
FRANK THOMPSON: Well, we don’t compete directly with Curro. They are in a different market sector to us and very often geographically different as well, although not always. I think that there is room for both. One of the exciting things about the Independent Education Sector is the need for more opportunities, for more students, for different kinds of diverse opportunities and for different price levels. Different economic requirements. It’s an area of massive need in our country and one in which we believe there’s plenty of room for active new participants and ourselves.
ALEC HOGG: From the market’s perspective you had it to yourself. These guys have come along and they are double your market cap. I mean, doesn’t that irritate you a tad, that these new boys are so much more highly-rated?
FRANK THOMPSON: You know, Alec. If you look at the scale of the respective operations and if you look at the history of what we do, the fact is that we are focused on doing it well and keep doing it better. We grow steadily and consistently. The noise in the market is really just that. The proof of the pudding is in the eating. Over the long run, our Board and, our large institutional shareholders, continue to express support for what we’re doing and confidence in what we’ve said we’re going to do. That’s our focus.
ALEC HOGG: But that’s exactly my point. You’re much bigger. You’re much stronger. You’ve got a completely different platform from which to work. Curro has a lot of promises but the market has rewarded them more. And that’s why I asked you; aren’t you just a tad irritated that the market has not given you the rating that you deserve?
FRANK THOMPSON: Well you know, for a mid-cap company like ours, our earnings multiple is round about 20. That, historically, is a reasonable outcome for a mid-sized company.
ALEC HOGG: I’d say.
FRANK THOMPSON: And in terms of understanding how the market values companies – my job is to have a good strategy and execute it well as best we can and that’s what we do.
ALEC HOGG: You’re continuing to focus along your current line, and as you say,  no noise is going to deviate you?
FRANK THOMPSON: Well, obviously we have to pay attention to developments in the market and there are interesting developments in the technology space. The percentage of students from outside South Africa is growing steadily, and we’ve got this consistent underpin of rising investments into existing and new businesses. That is a long story which will continue for a long time to come. We are sticking very much to that strategic knitting. That doesn’t mean nothing’s going to happen in Advtech. It means we’ve got a plan. We know what we’re doing and hopefully we’re doing it well.
ALEC HOGG: And you’ve got a market that’s almost infinite in many respects, given the need for education in this part of the world.
FRANK THOMPSON: Well, the opportunities are tremendous. The need for education opportunities and for diversity of education opportunities. There needs to be a variety of different kinds of opportunities for different people with different needs and aspirations and we cater for a large part of that market.
ALEC HOGG: Now the other part – the other point that you and I always have a little debate about is your recruitment business.
FRANK THOMPSON: Yes.
ALEC HOGG: It just seems to be getting smaller and smaller in the grand scheme of things – operating profit down in your recruitment side. Is there really a need to continue holding on there?
FRANK THOMPSON: Well, the recruitment business over the last few years, it’s often made very useful contributions to the overall group when we’ve needed it. Unfortunately in this time, with the very sad story of Labour Relations in this country, it spilled over into this year’s results. There have been some challenges in the Labour market. We think that our focus on key niche markets/high-demand skills is good for us. We think we’ve got a strong market position there and the ability to turn it to account over time, and the Board’s happy to keep on with that investment and to retain it as part of the Portfolio of Investments in the Group.
ALEC HOGG: Interesting that you’ve mentioned the Board a few times. I see you’ve got Lesley Maasdorp, an ex-banker (Goldman Sachs, ABSA, now chairman Merrill Lynch SA)  who’s now come in as your Chairman. Has he made much of an impact yet?
FRANK THOMPSON: Well, I think he’s made an excellent contribution as a dynamic chairman. The level of debate continues to be useful and helpful at Board meetings. No real change to strategy; just a very strong support and a good understanding of a very modern take on South Africa and the world of business. He has an enormous amount of experience.
ALEC HOGG: These numbers are for the first half of the year. You have now returned into the growth phase as you state in the commentary to your results. What’s the second half looking like?
FRANK THOMPSON: Well, experience has shown that the first half results are often a very good indicator of what’s going to happen for the full year. We believe this to be no exception, and for that reason we’re quite excited to see the tertiary turnaround reported in these numbers continuing into the second half. We believe that the growth in schools will continue. We’ve got a nice chunk of new school spaces or new capacity coming on-steam at the beginning of next year. We’re recruiting into that now, so we are very optimistic about the outlook for us.
ALEC HOGG: You’re also investing more in Varsity College in Durban North but you’ve found two new sites in Gauteng.
FRANK THOMPSON: Those are for schools.
ALEC HOGG: Where exactly?
FRANK THOMPSON: We haven’t given the details of that yet, but have announced the new Trinity School at Heritage Hill. There’s a new Crawford going up in Bedfordview – the Old Italian Club – Crawford Italia in a joint venture with the Italian community to service their needs.
