1H24: Distinctions at half year lift expectations

#themes: enrolment growth, operating leverage

ADvTECH's 1H24 results exceeded our expectations, driven by strong operating leverage in Tertiary Education and Rest of Africa schools. While investors largely anticipated these results, improved economic sentiment could further support spot. ADH’s share price has sustainably rallied c. 35% YTD, ahead of peers (Curro (not covered): +13%; Stadio (not covered): +12%), in our view indicative of investor comfort surrounding management changes and the group’s investment case. As investor interest shifts to the mid-cap sector, considering the robust rally in large-cap SA Inc, we continue to favour ADH. Moreover, we expect ADH (22%) to receive university accreditation before Stadio (14%) due to its higher proportion of post-graduate qualifications as % of total qualifications (NQF 5 – 10). ADH appears more attractive due to its higher-end market exposure and better capacity utilisation through the cycle than Curro. Our analysis also finds ADH’s superior ROE among its peers (c. 19% vs. SDO’s 12% and COH’s 1%) with potential for further improvement, given its sub-optimal capital structure compared to peers (Net Debt/EBITDA: ADH c. 0.6x, COH: c. 3x). We believe management could deploy additional capital and is open to increasing leverage if economic conditions are sustainably favourable.

ADH’s 1H24 earnings were up 16% y/y to 97.7 cps, ahead of our implied SBGS 1H24 estimate (c. 92.8cps). Group revenue increased by 9% y/y. The Education segment saw revenue up 12% y/y, reflecting a strategy focused on enrolment growth over price hikes, particularly in South Africa. Resourcing revenue was down -3% y/y due to low margin contracts concluding.

• SA Schools revenue was up 11% y/y (enrolment growth of c. 5%, implied fee increases of c. 6% in line with our expectations and sector c. 6.3%). Capacity utilisation (83%, Curro: 72%) remains within the target range of c. 83% - 85%. 
• ROA Schools revenue was up 11% y/y with enrolment of c. 4% and implied fee increases of c. 7% supported by enhancement of value through academic excellence awards and demand for higher fee Cambridge curriculum over national curricula. 
• Tertiary was the top performer with revenue was up 13% y/y (enrolment up c. 7% y/y, implied fee increases of c. 6%).

EBITDA margins expanded by c. 40bps y/y to 24.2%, while operating profit was up 15% y/y translating to margin expansion of c. 100bps y/y to 20.2% (all divisions reporting margin improvements).

We adjust our estimated fair value range to R36 to R39 (previously R32 to R35), providing potential total return of 10% to 19%, including a dividend yield of 3.6%. We forecast dil. NEPS of 199cps and 223cps in FY24E and FY25E respectively. In arriving at our forecasts, we factor in: i) Tertiary’s strong operating leverage;; ii) potential enrolment growth from Rosebank Colleges' expansion projects; iii) improved economic conditions benefiting mid-fee and lower tuition colleges; and iv) reduced Resourcing's FY24E revenue growth due to the conclusion of contracts in Rest of Africa.

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