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Monday, 12 September 2022

Are education stocks living up to their “defensive” reputation?

An uptick in performance by education shares suggests they may be living up to their reputation of being “defensive.” Investors typically consider the education industry — along with healthcare and consumer staples such as food and beverage — to be defensive: Businesses that provide goods and services that people must buy every day, regardless of how the economy is performing, meaning they may not promise the fastest or most significant price appreciation, but outperform in a downturn. When we last examined education shares last quarter, we found that they hadn’t held on to their reputation, falling more or less the same rate as the wider market.

Education shares have shown mixed performance this year, with a couple moving in tandem with the wider market — the benchmark EGX30 is down 13.3% year-to-date. The sector then has two outliers: One has massively underperformed against the market, while the other has bucked the trend to outperform the market and its peers.

We have less than a handful of education stocks in Egypt: Industry leader CIRA operates K-12 schools Mavericks and Futures, as well as Badr University, and leads the sector with a market cap of around EGP 6.8 bn. Then there’s CIRA subsidiary, Cairo for Educational Services (CAED), the Suez Canal Company for Technology Settling (SCTS), which owns and operates the Sixth of October University, and Taaleem Management Services, a higher education management company.

Let’s take a look at how these stocks performed since the beginning of the year: For the purpose of this analysis, we’ll look at education players’ stocks on a YTD basis and from the beginning of the third quarter of their academic year (which runs from March-May) until now. While most of the companies fell on a YTD basis, they have been outperforming the EGX30 when looking at the five-month period beginning in 2Q 2022, according to market data.

The EGX30’s YTD return is -13.3%, while its return since March is -1.2%.

Taaleem shares have fallen c.30% YTD and are flat 1 March (now changing hands at EGP 3.62 per share, TALM’s stock has whipsawed between EGP 4.08 and EGP 2.80 per share in the period since 1 March). SCTS — the sector’s second-worst performing stock on a year-to-date basis — is down 13.6% YTD and is up 3.7% since 1 March. CIRA shares are down just 11% YTD, but the leading private sector education player’s stocks have rallied nearly 9% since 1 March. The much more illiquid CAED once again bucked the trend, rising 17% YTD and 15.3% since 1 April to EGP 15.50.

How does this compare to their earnings?

  • CIRA’s bottom line fell 30% y-o-y to EGP 149.5 mn in 3Q 2021-2022 (which runs from March-May), despite revenues coming in slightly higher y-o-y at EGP 520.1 mn.
  • SCTS’ net income after minority interest plunged 52% y-o-y during the third quarter of the academic year to EGP 62.5 mn, while revenues inched up 3.9% y-o-y to EGP 298.7 mn, according to its financials (pdf).
  • CAED saw net income rise 5% y-o-y to EGP 10.8 mn on revenues of EGP 28.3 mn, up 13.3% y-o-y, its financials (pdf) show.
  • Taaleem reported (pdf) a 2% y-o-y drop in revenues during the quarter to EGP 263 mn, while net income in 3Q 2021-2022 rose 39% y-o-y to EGP 138 mn.

Unlike other sectors, there are hardly ever surprises with education earnings: “Regardless of EGP devaluation or macroeconomic conditions, education will continue and revenue streams are clear,” says Aly Adel, vice president of research at Beltone Financial. “As soon as the 1Q earnings are reported, investors have better visibility on the rest of the year’s performance,” Alaa Tolba, consumer sector head at CI Capital, told Enterprise. “It is only a matter of revenue recognition, as you now know the number of students, average tuition per student, and the budgeted costs for the year, with limited surprises,” she said.

Devaluation, for example, has a minimal effect on the education sector. While currency fluctuations could affect margins if some employees get paid in foreign currency, education institutes would be able to offset that with an increase in tuition, explains Adel.

Sector dynamics and regulatory changes have a bigger impact than do macroeconomics: The ongoing shift in academic calendar, normalizing from previous covid-19 delays, had resulted in fewer (or more) academic days recognized y-o-y per quarter, which in turn, disrupted quarterly earnings, explains Tolba. The centralized admissions platform that launched last year for private universities (which has since been scrapped) and a mismatch between Thanaweya Amma’s grade curve and faculties’ minimum requirements had resulted in fewer students being accepted to their colleges of choice. “These kinds of regulatory changes are external factors that could affect a company’s profitability, which could lead to a stock reacting negatively,” said Tolba.

Expansions are likely to help push companies — and their share performance — upward: The two high-profile listed companies, CIRA and Taaleem, both have expansion plans that will likely serve their stock performance in the medium and long-term, Tolba said. “We see value in both companies, capitalizing on the growth story within the sector,” she said, adding that there is huge demand in the country that is unmatched by the limited supply within the private space. “There’s a need for expansion,” she said.

Can education stocks keep their upward trend going? Share prices will likely continue their upward momentum, Adel expects, due to the improvement in general market sentiment, less economic uncertainty, and some foreign investors eyeing a return to the EGX. “All of this indicates that the momentum in the market can continue, and education can have the same uptrend,” he said.


Your top education stories for the week:

  • Scotland’s Queen Margaret University could be interested in opening a branch in the new capital.
  • The Higher Education Ministry and USAID are establishing a center for professional development and labor market studies.
  • The Education Ministry inked a cooperation protocol with the Arab Academy for Science, Technology and Maritime Transport to train students and faculty of the Dabaa nuclear technical school.

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