• ADvTECH announced impressive 1H21 results, a 31% rise in normalised HEPS and a resumption of dividends (19c DPS). Growth is to some extent distorted by a lower base given the impact of COVID-19 on 1H20 results (normalised HEPS declined 2%). A sharp recovery was seen in the credit loss charge, the SA Resources business and the Rest of Africa school operations which recorded a profit vs recent losses. De-gearing of the balance sheet is having a material impact as capex is minimised with school expansions placed on hold till at least 2023.
  • Ignoring COVID-19’s impact, the result reflects five key themes that will continue to benefit future results, namely (1) the demand for quality education in SA as the public sector continues to disappoint; (2) increasing the utilisation rates of existing schools; (3) the benefits from diversifying into under serviced African markets; (4) the investment into online learning which resulted in no school days lost and an alternative delivery method that is gaining traction; (5) the benefits from centralising operational activities including debtor management.
  • Enrolment issues and disappointing matric results further highlighted the strain on public schooling and universities. Against this backdrop and difficult economic times, families are prioritising a quality education for their children. This is being made easier with the gap between public school and university fees narrowing considerably compared to ADvTECH’s fees. With school utilisation rates at 81.7% there is considerable scope to grow student numbers with little incremental cost.
  • The credit loss charge as a % of revenue showed a surprising reduction in 1H21, from 6% to 3%. Whilst 1H20 was elevated due to COVID-19, the benefits of managing debtors centrally is translating into lower losses, particularly in Schools. The intake of better risk students will allow for a structurally lower credit charge going forward.
  • We see robust HEPS growth in the medium term, 23% in FY21E and 18% in FY22E. Continued lower capex will result in ongoing deleveraging and strong cash generation, we expect FCF yields to rise to 9% and 9.8% in FY21E and FY22E. Dividends are resumed and we anticipate a 36% payout ratio in FY21E rising to 45% in FY22E.On our estimates ADvTECH is trading on a forward 12m P/E of 13.2x and 7.4x EV/EBITDA. It continues to trade at a considerable discount to Curro and Stadio. In our DFCF valuation we calculate a fair value range of R17.67-23.13/share. Key risks to our forecasts and valuation include further impact from COVID-19 and a disappointing recovery in the SA economy leading to a deterioration in affordability.

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