The listing of fledgling private-school
company Pembury Lifestyle Group (PLG) last week recalled, somewhat
ominously, last year’s listing of convenience eatery business Gold
Brands International.
PLG, like Gold Brands, looks suspiciously like an entity cobbled together to ride on the coattails of similar companies that are enjoying strong investor interest on the JSE.
Whereas Gold Brands might have hoped to catch some of the strong sentiment reserved for Famous Brands and Spur Corp, PLG might have banked on grabbing some of the enthusiasm for highly rated private-education ventures Curro Holdings and AdvTech.
At the time of writing PLG had drifted below its prelisting issue price of 100c/share.
Admittedly a lack of market interest might well be explained by dastardly political developments only hours before PLG listed.
But the truth is that PLG, like Gold Brands, just doesn’t compare with the operational scale, brand power, management strength and balance sheets of its larger listed competitors.
PLG, like Gold Brands, looks suspiciously like an entity cobbled together to ride on the coattails of similar companies that are enjoying strong investor interest on the JSE.
Whereas Gold Brands might have hoped to catch some of the strong sentiment reserved for Famous Brands and Spur Corp, PLG might have banked on grabbing some of the enthusiasm for highly rated private-education ventures Curro Holdings and AdvTech.
At the time of writing PLG had drifted below its prelisting issue price of 100c/share.
Admittedly a lack of market interest might well be explained by dastardly political developments only hours before PLG listed.
But the truth is that PLG, like Gold Brands, just doesn’t compare with the operational scale, brand power, management strength and balance sheets of its larger listed competitors.
History will show that the JSE often
attracts companies that opportunistically list when sentiment is
favourable for a certain sector.
Older readers may remember companies like Y2K Tech, Billboard, Brainware, Core Holdings, Tradek, Sasani, Paradigm, National Sporting Index, O’Hagan’s, Micrologix, Kingco, Iota Financial Services and Infiniti Technologies, to name just a few.
None of these managed to capitalise on the prevailing fad, and optimistic shareholders endured third-degree wallet burns.
Whether PLG lasts the course will depend on the company rolling out some ambitious growth plans. It got off to a fair start by placing all the shares it offered, raising R140m.
As Curro’s rapid development trajectory showed, R140m probably won’t go a long way. PLG might well find itself tapping its shareholders and the market for further capital in the next 18 months. By that time the company will need to have convincing operational traction to back up its growth story.
Older readers may remember companies like Y2K Tech, Billboard, Brainware, Core Holdings, Tradek, Sasani, Paradigm, National Sporting Index, O’Hagan’s, Micrologix, Kingco, Iota Financial Services and Infiniti Technologies, to name just a few.
None of these managed to capitalise on the prevailing fad, and optimistic shareholders endured third-degree wallet burns.
Whether PLG lasts the course will depend on the company rolling out some ambitious growth plans. It got off to a fair start by placing all the shares it offered, raising R140m.
As Curro’s rapid development trajectory showed, R140m probably won’t go a long way. PLG might well find itself tapping its shareholders and the market for further capital in the next 18 months. By that time the company will need to have convincing operational traction to back up its growth story.
This is exactly what Curro outgoing CEO
Chris van der Merwe managed to do when the company’s school rollout
programme accelerated well beyond initial expectations. Under Van der
Merwe’s watch — and under the beady eye of demanding majority
shareholder PSG — Curro generated encouraging top-line growth. More
importantly, it never faltered (even slightly) in its ambitious school
rollout plans.
PLG started this year with seven campuses comprising 19 schools that accommodate 1,810 pupils mainly in the Gauteng catchment area. The medium-term target is 13 campuses by 2020, with a view to expanding into other provinces and diversifying by looking at the technical side of tertiary education. The longer-term target is 17 campuses comprising 45 schools.
The PLG pitch revolves mainly around smaller classes and affordable private tuition fees that are pegged 15%-20% lower than its nearest competitor (which presumably is Curro). The other differentiating factor is that PLG, which started its corporate life as a property development company, can be quicker to market with its smaller schools, which are not only less capital intensive but also easier to maintain.
PLG has indicated it’s possible to start up a school in six months — remembering that its schools don’t offer traditional sports, which require redeveloping large tracts of land.
Though the campuses are small, there is also a strong insinuation that building a school raises the value of the underlying property markedly.
PLG started this year with seven campuses comprising 19 schools that accommodate 1,810 pupils mainly in the Gauteng catchment area. The medium-term target is 13 campuses by 2020, with a view to expanding into other provinces and diversifying by looking at the technical side of tertiary education. The longer-term target is 17 campuses comprising 45 schools.
The PLG pitch revolves mainly around smaller classes and affordable private tuition fees that are pegged 15%-20% lower than its nearest competitor (which presumably is Curro). The other differentiating factor is that PLG, which started its corporate life as a property development company, can be quicker to market with its smaller schools, which are not only less capital intensive but also easier to maintain.
PLG has indicated it’s possible to start up a school in six months — remembering that its schools don’t offer traditional sports, which require redeveloping large tracts of land.
Though the campuses are small, there is also a strong insinuation that building a school raises the value of the underlying property markedly.
At a recent investment presentation, PLG CEO
Andrew McLachlan said land bought for R136m had been revalued at more
than R200m "by virtue of us occupying the properties".
The financial year to end-December 2017 pencils in revenue of R70m with a net loss of R4.6m. But PLG sees that changing quickly in 2018, when revenue of R138m is expected to translate into a net profit of R13m. This would mean earnings of 3.6c/share — putting PLG on a rather demanding two-year forward earnings multiple of about 25 times.
PLG predicts revenue of R254m in the 2019 financial year with net profits at R45m — or 12.7c/share. These are compelling numbers for the medium term, and it’s easy to see why retail investors that may have missed out on making an early investment on Curro or buying AdvTech during its "neglected" phase have been content to take a chance on PLG.
The bigger-picture story for private education — remembering that astute investment companies like RECM & Calibre and Trematon Capital have also made cautious forays into specialised private education — remains attractive.
There is a growing middle class seeking quality education offerings at a time when less than half of SA’s learners complete grade 12 and less than 5% push through to attain a degree. Government education remains in a mess — but private schools still only represent 5% of all schools in SA, with just over 500,000 learners enrolled.
However, the Financial Mail still has some reservations around PLG, and would prefer to monitor the share price movements in the run-up to the first interim report to end-June.
One has to recognise that what has transpired in PLG is that a property development company — primarily involved in the retirement-home niche — suddenly stumbled on the brilliant idea to convert properties into schools. It is difficult not to apply the cynic’s investment principle: "If it sounds too good to be true, it probably is ..."
If PLG is given the benefit of the doubt in its ability to successfully adapt its business model, it is worth noting that the company’s board of directors, unlike those of Curro and AdvTech, lacks gravitas when it comes to academic executives. Both Curro and AdvTech boast enviable pass rates and performance achievements (especially AdvTech’s Crawford Colleges), which have helped enormously in brand building and reinforcing pricing power in fees.
The financial year to end-December 2017 pencils in revenue of R70m with a net loss of R4.6m. But PLG sees that changing quickly in 2018, when revenue of R138m is expected to translate into a net profit of R13m. This would mean earnings of 3.6c/share — putting PLG on a rather demanding two-year forward earnings multiple of about 25 times.
PLG predicts revenue of R254m in the 2019 financial year with net profits at R45m — or 12.7c/share. These are compelling numbers for the medium term, and it’s easy to see why retail investors that may have missed out on making an early investment on Curro or buying AdvTech during its "neglected" phase have been content to take a chance on PLG.
The bigger-picture story for private education — remembering that astute investment companies like RECM & Calibre and Trematon Capital have also made cautious forays into specialised private education — remains attractive.
There is a growing middle class seeking quality education offerings at a time when less than half of SA’s learners complete grade 12 and less than 5% push through to attain a degree. Government education remains in a mess — but private schools still only represent 5% of all schools in SA, with just over 500,000 learners enrolled.
However, the Financial Mail still has some reservations around PLG, and would prefer to monitor the share price movements in the run-up to the first interim report to end-June.
One has to recognise that what has transpired in PLG is that a property development company — primarily involved in the retirement-home niche — suddenly stumbled on the brilliant idea to convert properties into schools. It is difficult not to apply the cynic’s investment principle: "If it sounds too good to be true, it probably is ..."
If PLG is given the benefit of the doubt in its ability to successfully adapt its business model, it is worth noting that the company’s board of directors, unlike those of Curro and AdvTech, lacks gravitas when it comes to academic executives. Both Curro and AdvTech boast enviable pass rates and performance achievements (especially AdvTech’s Crawford Colleges), which have helped enormously in brand building and reinforcing pricing power in fees.
It will take some time for the PLG brand to
build up a track record in academic achievement, and this may mean
competing with AdvTech and Curro (and others) mainly on price.
One market analyst who has given some backing to PLG is Vunani Securities’ Anthony Clark. His opinion is worth hearing, as he was one of the few analysts (maybe the only one, in fact) who backed Curro strongly when it was spun out of PSG and listed in 2011.
He notes that the institutional market was sceptical of PLG, much as it was for the Curro listing. "The lack of any institutional support in the PLG IPO may curtail the after-market demand ... I can see PLG having a muted opening listing and [it] may [like Curro] be lethargic until some deal and result traction catches the market’s imagination," he says.
Clark points out that PLG will be referenced to developments at Curro over the past seven years. "With Curro now at close to R50 with R20.2bn market capitalisation, those that missed getting in at the 400c/share rights issue at listing will be harking back and wondering ‘what if’ when it comes to the PLG listing. PLG is not a Curro — but PLG has a novel, small niche."
One matter to mull if PLG’s share price continues to drift downwards is whether the company will become an attractive takeover target. With a market capitalisation of less than R350m, PLG would be an affordable opportunity, should Curro or AdvTech want to swoop.
The big question, of course, is whether a larger rival would want to pay up a demanding forward earnings multiple to buy additional learner numbers, or whether it would be better to compete head-on for additional market share.
The Financial Mail suspects, at this juncture, the latter would apply.
One market analyst who has given some backing to PLG is Vunani Securities’ Anthony Clark. His opinion is worth hearing, as he was one of the few analysts (maybe the only one, in fact) who backed Curro strongly when it was spun out of PSG and listed in 2011.
He notes that the institutional market was sceptical of PLG, much as it was for the Curro listing. "The lack of any institutional support in the PLG IPO may curtail the after-market demand ... I can see PLG having a muted opening listing and [it] may [like Curro] be lethargic until some deal and result traction catches the market’s imagination," he says.
Clark points out that PLG will be referenced to developments at Curro over the past seven years. "With Curro now at close to R50 with R20.2bn market capitalisation, those that missed getting in at the 400c/share rights issue at listing will be harking back and wondering ‘what if’ when it comes to the PLG listing. PLG is not a Curro — but PLG has a novel, small niche."
One matter to mull if PLG’s share price continues to drift downwards is whether the company will become an attractive takeover target. With a market capitalisation of less than R350m, PLG would be an affordable opportunity, should Curro or AdvTech want to swoop.
The big question, of course, is whether a larger rival would want to pay up a demanding forward earnings multiple to buy additional learner numbers, or whether it would be better to compete head-on for additional market share.
The Financial Mail suspects, at this juncture, the latter would apply.
@BDlive SA
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