The Finance Ghost: The market lowdown on Rainbow, RCL Foods, Curro, AdVTech and Stadio

10 Mar 2024

If there’s one theme that has come through strongly in the flurry of results over the past week or two, it’s that companies are working incredibly hard for the benefit of debt holders rather than equity holders.

There were significant increases in interest rates and the sizes of balance sheets in 2023, which means net finance costs went through the roof at most companies.

That’s good for banks (like Nedbank’s great second half in 2023), but not good for basically everyone else. Unless companies achieved strong growth in operating profit or had no debt on the balance sheet, there was a disappointing outcome for shareholders with almost nonexistent Heps growth.

Despite this, there have been good news stories this year. We begin with a Rainbow and a pot of gold.

If you’re going to play around in businesses that have structurally low margins, then you need to prepare yourself for volatile net profits. On a 3% net margin, a 100 basis points difference somewhere in the income statement is a 33% difference in net profit.

This can drive wild swings in share prices, particularly in the pure-play poultry options on the JSE.

There will be another chicken specialist soon, as RCL Foods is planning to unbundle and separately list Rainbow.

The group has diversified away from poultry over time, and Rainbow has contributed R270.6-million in Ebitda for the six months to December 2023 versus R1.25-billion in the “value-added business” that comprises groceries, baking and sugar.

Just how volatile are these profits? Well, Rainbow made a loss at Ebitda level of R6.1-million in the comparable period.

The Ebitda margin has moved from -0.1% to 3.7%. That would be a wild ride for the share price if Rainbow was the only business in the group.

As the entire business at RCL Foods improved significantly over the six-month period (in other words, not just Rainbow), the share price rallied by more than 20% in 2024. However, you need to time your entry and exit carefully with this one because the share price is still nearly 12% down over 12 months.

Curro piles pressure on parents

Curro is saying one thing about trying to fill its schools and doing quite another when it comes to the pricing strategy. A tuition fee increase of 12% doesn’t make sense when it says it wants to get more bums on seats.

It’s not as though it had to increase fees by that amount to recoup expenses. Although there were obviously inflationary pressures in the cost base, there was only a 7% increase in employee costs. This means that the fee increase drove Ebitda up by 25% and Heps up by 19%.

As uncomfortable as it can become in an educational context, Curro exists to make a profit. We don’t need to debate whether tuition increases of this nature are morally right or wrong.

We do need to think about whether this is the right long-term strategy, though, as parents may think twice about an enrolment at Curro when faced with a gauntlet of such high increases relative to inflation.

Curro’s share price is flat in 2024, but it is up by a spectacular 42% over the past 12 months. Again, you need to pay careful attention to your timing on this stock, as the price is down compared with January 2022.

* Curro has clarified that although total tuition fee revenue increased by 12% during the 2024 financial year, the average fee increase per Curro learner was around 8%. Considering these facts, Curro disagrees with the column’s assertion that it is “piling pressure on parents” and says it has limited fee increases as far as possible.

Other education groups

Although we don’t have the detailed financials yet, we do have trading statements from AdVTech and Stadio. The former is a mix of primary, secondary and tertiary education, and the latter is purely a tertiary play. ADvTECH also has some business interests beyond schooling.

Enrolments at its schools are in line with expectations for 2024, so that’s encouraging for the new financial year. For the year ended December 2023, Heps grew by between 16% and 21%. I look forward to seeing how much of this was due to pricing versus volume changes.

At Stadio, Heps for the year ended December 2023 increased by between 17.6% and 27.6%. That’s a strong result, with no further details given in the trading statement around the core drivers of the result.

If ever you needed more convincing that share price performance is a function of both earnings growth and valuation, you can consider AdVTech’s share price performance over 12 months (+68%) versus Stadio’s (+6%). Stadio has had a lot of growth priced into it, so the share price doesn’t offer much likelihood of outsized returns. DM

This story first appeared in our weekly Daily Maverick 168 newspaper, which is available countrywide for R29.

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Curro piles pressure on parents

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