Advtech – A masterclass in execution

ADVTECH

Advtech holds a firm place in the Crown Club. The company has invested in growth opportunities backed by secular trends over many years, building private schools and tertiary institutions with solid academic track records and strong graduate employability. This has earned the recognition of parents, employers, and academic peers. The result has been sustained organic revenue growth on rising margins. Today, Advtech is a leading education group with material competitive advantages. With free cash generation and returns on equity (ROE) now healthy – even alongside continued investment – that growth has converted into excellent returns for shareholders over time.

A DECADE-PLUS OF HEAVY INVESTMENT AND GROWTH

South Africa's private education industry has long been attractive. The State has been unable to invest sufficiently to meet the demand for quality education, and its execution has been inconsistent. The challenges of public schooling are well documented: State resources are best directed at those who cannot afford alternatives, leaving private capital to serve the rest. In tertiary education, capacity remains constrained while demand grows (Figure 1). With State spend per student declining in real terms, investment in the tertiary sector is being eroded, raising concerns about quality and sustainability.

Advtech has invested heavily over the years, growing its schooling and tertiary platforms. Alongside new capacity, it has continued to invest in its product offering – in scale, quality, capability, and consumer value. Management has balanced margin expansion against reinvestment in fee competitiveness, better facilities, wider tertiary offerings, talent, research and development (R&D), systems and technology, and growth costs. This has kept the group's institutions well-invested and competitive.

Particularly noteworthy is its significant investment in its large Academic Centre of Excellence, the academic backbone of the group. It develops academic intellectual property and best practices centrally, embeds them across schools and tertiary brands, and continuously improves them through digitisation, data, technology, and research. This creates a scalable engine of academic quality and differentiated education experiences. It is also a costly capability that can only be funded efficiently through scale economics, making it hard, if not impossible, for standalone or sub-scale players to replicate. Combined with continued investment in affordable fee increases – around and at times below inflation – Advtech has delivered superior academic outcomes on increasingly competitive fees, strengthening consumer value (Figure 2).

Taken together, all the above has driven the group's above-average enrolment growth and market share gains over the last nine to ten years (Figure 3). Most notably, it has enabled Advtech to legitimise private tertiary education as a category and build large, well-regarded institutions. These are increasingly first-choice institutions and are narrowing the gap with leading State universities as they collectively educate over 70 000 students per year.

Advtech's cycle of investment and reinvestment has strengthened its right to win, sustained its above-average growth, and expanded its resources to compete. The size and persistence of reinvestment is clear, as shown in Figure 4: both operational and capital expenditure have more than tripled since 2015 and grown well ahead of nominal GDP over both 10 years and the recent period. It reflects sustained investment in growing physical capacity, upgrading and relocating campuses, improving facilities, modernising systems, strengthening shared services, securing and developing talent, sustaining R&D, and building technology- and AI-enabled teaching and learning capabilities. This combination has enabled Advtech to add volumes, improve the quality and consistency of delivery, and unlock cost efficiencies, driving the flywheel of volume growth, scale efficiencies, reinvestment, and further growth.

Over time, growth has compounded and unlocked the scale efficiencies that support superior academic execution at competitive cost structures and fees, deepening the moat. Healthy profit growth on disciplined margin expansion has followed, supporting our view that Advtech is a well-invested business with strong execution and growing competitive advantages.

FREE CASH FLOW AND RETURNS

After many years of investment, Advtech is now growing both free cash flow (FCF) and returns while continuing to invest. The path required several restructurings to unlock the value of its education assets and drive growth, with that effort led by the previous senior management team for over a decade and the current leadership amplifying that success in recent years. This was a lengthy exercise given the long-dated nature of these investments and the reality of restructurings. It required investor patience during the build-out and restructuring years while the engines of growth were being built.

Figure 5 summarises the investments and payoffs. Earnings and cash generated through the 2010s were absorbed by heavy organic and acquisitive investment, depressing FCF and ROEs. This reflected the backend-loaded nature of the economics of education investments. As institutions grew enrolments over time and took market share, revenue, margins, cash flow, and returns improved while growth capex became less of a drag. FCF is now healthy and ROEs are above 20% and rising. These metrics understate the potential, since investment for growth remains material and not all campuses are mature.

SHAREHOLDER RETURNS, VALUATION AND FUTURE PROSPECTS

The work of the last decade-plus has delivered for shareholders. Competitive advantages have deepened, long-term growth prospects remain solid, and earnings growth on improving cash generation and returns has translated into strong total shareholder returns, as shown in Figure 6.

Despite that history, we remain fully invested. We acknowledge the risks, chief among them the Group's meaningful growth aspirations into the rest of Africa that could prove a distraction and destroy capital; a weak South African economy that could undermine affordability of private education and hurt demand; and long-term pressure on labour costs that could drive unaffordable fee increases, weighing on volume growth and pressuring margins.

But we have supported the company for many years (Figure 7), on the view that strong managerial execution and a structural growth opportunity offset these risks. And at a mid- to high-teens price:earnings (p:e) multiple, we believe the market continues to underappreciate the quality of the business and its long-term prospects. The share price performance of the last seven years has been driven largely by earnings growth, while the multiple remains undemanding and broadly in line with history. The strength of Advtech's competitive advantages and its prospects for the future combine with an attractive valuation, making Advtech a core member of the Crown Club and a key position within our client portfolios.

^[1] Success rate: The number of students that pass a module vs how many registered for that module. Price/mix: The % change in average selling price from both fee increases and sales-mix shifts. The gap to headline/education inflation suggests fee increases have stayed moderate, in line with ADvTECH's stated strategy.

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