Once a market darling, private education provider Curro’s lowly share price is being punished partly by an economic loss of almost R13 billion since its 2011 listing. The problem is the Curro business model, likened to a run-away truck without brakes by business analyst Ted Black. The group should be in the business of teaching, not running a property portfolio, and soaring classroom numbers is not a panacea for its ills, says Black. Instead, Curro should interrogate the Rand value of sales generated for every Rand of assets under it management, the Asset Turnover (ATO) measure, that all too often is overlooked by corporates. The ATO, along with the Return On Sales and Return On Assets Managed metrics, is key to measuring the efficacy of management’s operations, says Black. – Derek Alberts
Curro’s low “ATO” problem
By Ted Black*
The mismanagement of the Covid pandemic by governments around the world has revealed the huge problem of innumeracy even at the highest levels, and what seems like a pervasive, underlying hostility towards business amongst the intelligentsia. Or maybe it’s “bafflement”, as Peter Drucker once put it.
It’s clear that politicians, academics, “experts”, and civil servants know little about business in industrial society, or have any clue as to how quickly companies will hit a brick wall when cash stops coming in from customers. This presents a major education task – especially amongst the world’s young who face an even bleaker future than they did before the pandemic struck.
On this topic, look at Curro in the private school education sector. Its growth has been phenomenal. Starting in a church vestry with 28 pupils in 1998, it now teaches more than 60,000 of them in 175 schools on 76 campuses. Moreover, since listing in 2011, the asset base grew from R600 million to R10,5 billion in 2019. It’s no wonder Marc Hasenfuss called it a “Juggernaut” in a recent Business Day article.
However, is it like a huge truck careering downhill with no brakes? Annual reports reveal a number of measures of concern. Two are in the chart below: the “Value-of-the-Firm” (VOF) or market cap, and cumulative Free Cash Flow (FCF) calculated as Cash generated by operations less cash utilised in investing activities.
Shaped like a Covid one, the VOF curve has fallen by more than 80% since its height of R20,6 billion in 2015 and Free Cash Flow has been negative every year since listing. It may partly explain the steep plunge and why the firm has had five rights issues to help fund growth. What other causes might explain the trends?
The only valid measures of a manager’s competence, intent and results are productivity ratios. In financial terms, key ones for operating management are shown next.
The three most important measures are highlighted ATO (Asset Turnover), ROS (Return on Sales) and ROAM (Return on Assets Managed). The most important of the three is ATO. It’s one rarely used either to assess strategy and business models, or as a key productivity ratio. Curro’s management, its well-educated board and main investors are like those in so many other firms – SAB Miller, A-B Inbev, Naspers/Prosus, Nampak, Aspen and more – who don’t seem to know that. You can be sure that few, if any, of Curro’s teaching staff do either.
The first of two strategic marketing questions ROAM asks is “How many Rands of Sales do we generate for every Rand of Assets we manage?” (ATO). The second is, “For every Rand of Sales how many cents profit do we make?” (ROS%). Multiply the two and you have your ROAM%.
So how does Curro fare compared to Advtech, also in education, and retail ROAM exemplar – Mr Price?
Why Mr Price? Well, Taiichi Ohno of Toyota did redesign his post-World War 2 production system after watching how inventory was managed in a supermarket in America.
The message couldn’t be clearer – the higher your asset intensity, low ATO, the lower your ROAM is likely to be. The ROS margins of all three firms are good – Curro and Advtech average close to 15% and Mr Price is a tad higher at 16%.
Despite its high ROS%, Curro is stuck in the bottom left hand corner generating only 28 cents in sales for every Rand of assets. Advtech’s ATO has fallen by more than 50% since 2011 – it is now 0,67 – and its ROAM 42% lower despite an improved ROS%.
As to our exemplar Mr Price, lower costs and a higher Gross Profit have offset its relatively high but also declining ATO. Management mustn’t allow it to fall below 2,0. Instead, apply “The ATO Rule of Thumb: Beat 2,0; Aim for 3,0; Strive for 4,0 or more!”
There’s another big, low ATO effect. Below 1,0 it’s hard to generate a ROAM that’s high enough to beat the cost-of-capital hurdle. This may not be the purist’s way to calculate it, but deduct a 20% Cost of Equity (COE) from operating cash generated after interest and tax and you get this picture of cumulative economic profit or loss for the three firms since 2011:
Based on what is a challenging but reasonable COE demand, Curro’s management has generated an economic loss of almost R13 billion since its listing in 2011. Advtech also went into a loss once it’s ATO fell below 1,0. The message these charts send is that Curro’s value destruction curve is unstoppable unless management redesigns its business model.
Property accounts for 84% of a fixed, inflexible asset base and raises a question that Curro management needs to ask itself: “Must we own all the properties and buildings we use to teach our scholars, or should we aim to control most of them instead?”
From a relative competitive view, if Curro were going head-to-head with Advtech, then it would immediately be at disadvantage using a hybrid measure – the Capital Cost per Student. The measure is the amount of assets used to support each student.
In 2019 Curro used R182,000 and Advtech R108,000. It’s a big productivity gap.
Many years ago I worked for a steel trading company started by two talented entrepreneurs. The first amongst these two equals was a CA. Instead of being conservative, he had steel gonads when it came to risk. Despite my concerns, we acquired a company with an ATO of 1,0. The deal stretched us causing our bank – one whose logo included an umbrella with a slogan something like “You can trust us when it rains!” – to fold its brolly just when we needed it.
The good news was that we owned the land and buildings and knew that we made our money out of buying, stocking and processing steel – not the properties. Fortuitously, up the road from us the Iscor pension fund was building an industrial park. As pension funds like investing in land and buildings, it bought ours and we moved our operations into theirs. It transformed the business.
Could Curro do something similar? It makes its money from teaching, not owning property. By continuing to do that as well as it clearly does, the firm would be a low-risk, high quality tenant. Maybe it’s an opportunity to explore.
Another, educational one, is to use its performance history to teach older students about the basics of business before they leave school. It may help them choose post-matric education or training that’s of value to society – a skill or practical knowledge that will qualify them to contribute to economic results, gain employment, or better still, start their own businesses.
So much of today’s highly expensive tertiary education doesn’t do that. Haven’t the young been duped by a false belief that it will? They think they have been vocationally educated but are still ignorant and unemployable – hence the statue bashing and all the other woke issues they use to foment anger. It’s understandable but misdirected and, in the end, only destructive.
- Ted Black is a mentor and coach, he uses the ROAM financial model and a 100-Day Action Project method to pinpoint and convert fuzzy problems and opportunities into high-precision, team-driven projects. Their aim is personal growth; to jack up learning fast, and to measure with tangible results. They are management on a small scale – the rule is less talk, more action. Black has written and co-authored several books that include “Who Moved My Share Price?” published by Jonathan Ball.
