Curro … A great "problem/ opportunity": Ted Black

Key topics:Curro faces weak asset productivity vs rival Advtech in education sectorCumulative losses: R7bn free cash flow shortfall, R41bn economic lossJannie Mouton Foundation aims to delist Curro for long-term stability.Sign up for your early morning brew of the BizNews Insider to keep you up to speed with the content that matters. The newsletter will land in your inbox at 5:30am weekdays. Register here.Support South Africa’s bastion of independent journalism, offering balanced insights on investments, business, and the political economy, by joining BizNews Premium. Register here.If you prefer WhatsApp for updates, sign up to the BizNews channel here..By Ted Black.Curro is a great management case study. Since its start in a church vestry with 28 pupils in 1998, today it has more than 70 000 pupils on its books. To help fund its growth, it listed on the AltX in 2011 and the JSE a year later. Now the philanthropic Jannie Mouton Foundation aims to buy, then de-list it.There are many reasons for such a decision. Not least are the strategic flexibility and cost savings that follow a leap out of the stock exchange goldfish bowl. But what economic productivity issues might have prompted it?In a 2020 article my “One Big Idea” theme was the low sales productivity of Curro’s asset base, not its sales margins – the ones people look at first. Here is Curro’s ROS% (EBIT/Sales%) trend since 2011 compared to Advtech..Both firms show a healthy trend. With steady improvement since 2020, Advtech’s average ROS is 3% higher. This measure answers the first strategic marketing question: “How many cents profit do we make for every Rand of sales?”The second is: “For every Rand of assets how many Rands of Sales do we generate?” In the asset intensive education sector, it’s low – you measure it in Cents, not Rands. Here’s how Curro and Advtech compare with Asset Turn (ATO) and their “Return on Assets Managed” (ROAM%)..Advtech’s ATO is double Curro’s and so is its overall return on assets (ROAM%). That’s the leverage power of ATO. Few management teams seem to know what an important measure it is. The low asset turn takes us to another key productivity measure – the “Asset Cost per Student”. Curro’s is far higher than Advtech’s … 81% higher..From the start, this gap puts Curro on the back foot when looking at total cash needed to fund the business. It’s only in the last couple of years that the firm has generated Free Cash Flow. The cumulative number since 2011 is minus R7 Billion.“Start-ups” are a form of gambling and successful entrepreneurs get to use “House Money” much faster than their corporate counterparts. Curro hasn’t managed to do that. Since listing it has used several Rights Issues to raise cash..Read more:.Race debate: Political bluster vs. public reality at Curro school – IRR.Which brings us to another measure, also a cash one. It’s rarely used by managers because achieving an “Economic Profit” is tough. Imagine the “Owner” waiting at the back of a “Queue-for-Cash” of suppliers, employees, lenders, and Taxman, expecting a “Return” for the “Cost of the Equity” he put into the business. “Dividends” won’t cover it. Against a challenging, but realistic expectation of 20% for his “Risk” deducted from “Cash Profit after Tax”, this chart shows how Curro has performed since 2011..The result is a cumulative, economic loss of R41 Billion and the curve’s momentum looks unstoppable. Many might argue that an expectation of 20% is too high. Yet it works out at around an 11% “Cost of Assets Managed”. Isn’t that reasonable? To recover it, look at another “Cash” measure. Cash ROAM (Operating Cash ÷ Assets%) sets a “hurdle” that management must beat to generate an “Economic Profit”. Again, we compare the two firms..The hurdle, based on results achieved by them, looks to be an Operating Cash ROAM around 15%. Over the period, Advtech achieved a cumulative economic profit compared to Curro’s R41 Billion loss. But does that mean Curro isn’t viable? Not at all. But it does mean that management needs to act in ways that make the firm head north east on this Cash ROAM – Economic Profit Chart.High quality education is a “Critical Success Factor” for South Africa Inc and requires a long-term frame of mind to tackle it, not a short-term focus on “quarterly results” and the share price. Besides, as these charts show, the share price is the wrong measure of management competence.That’s what the Jannie Mouton Foundation will contribute if it succeeds with its bid – commitment and long-term thinking. Curro will have the right kind of “Owner”, and South Africa Inc. will benefit in a big way from entrepreneurial education ventures like it.

Curro … A great "problem/ opportunity": Ted Black

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