Monday, 13 February 2023

Education stocks continue strong performance post-float

Education shares have been on a tear this academic year, underscoring the relatively uncommon nature of private-sector education stocks in Egypt. They’re defensive, sure: Their product is an essential good that people need regardless of broader economic performance, which would suggest they generally do better than other sectors in a downturn. But the sector is also one heck of a growth play in good times: About 45% of our population is 19 or younger, and population growth is still coming in at about 1.7% per year (having peaked at about 2.3% per year in 2014).

In our last look at education shares last September, we found they showed mixed performance throughout the year, with one education player massively underperforming against the wider market. For the purpose of this analysis, we’ll assess how education players’ stocks performed on a YTD basis and from the beginning of the first quarter of their academic year (which runs from September-November) until now.

Which EGX-listed education players are there to speak of? There are a small handful of education stocks listed on the EGX, including industry leader CIRA Education, which operates K-12 schools Mavericks and Futures, as well as Badr University. The only other EGX-listed education players are 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.

Education shares doing better than they did in the same period a year ago: Most EGX-listed companies have shown strong returns when looking at the six-month period beginning in 1Q 2022-2023. The weakest performer among them still cranked out a positive (albeit very minor) return during the period since September. On a YTD basis, the same trend generally holds: The majority of the companies are up since the beginning of the year, with the exception of one player that has remained flat.

THE BENCHMARK: The EGX30 has returned a whopping 76.8% since September and is up 18.4% so far in 2023. The bourse rallied following October’s devaluation, making it one of the world’s best-performing indexes (in local-currency terms). Since the October devaluation, the bourse has soared more than 52.5%.

CIRA Education’s shares have risen some 28.7% since September and are up 6.9% YTD. The leading private sector education player’s shares have risen from EGP 11.23 per share at the beginning of the academic year in September to EGP 13.90. Taaleem’s stock has inched up 5.5% YTD and is up some 41.1% since September. SCTS is the sector’s worst-performing stock on a year-to-date basis but the best performer since September. The company’s stock is down 17.4% since 1 January, but has rallied 42.6% since September, hitting EGP 60.61 per share. CAED, which is much more illiquid, has remained flat YTD and has inched up a meager 0.5% since September to EGP 15.58.

Despite broadly doing well, education stocks haven’t done as well as the broader market — but that’s a function of their defensive nature, Beltone Financial Vice President of Research Aly Adel told Enterprise. “Education shares are known as ‘low-beta’ — their defensive nature limits both the upside and the downside in comparison to the wider market,” he explained. “So if the broader market rises by 10%, the stock doesn’t necessarily have to go up by the same amount.” But that also means the downside risk is more contained — if the overall market falls 10%, these defensive stocks are unlikely to be as affected, Adel said.

As for their earnings:

  • CIRA Education saw its revenues rise 25% y-o-y to EGP 536.1 mn in 1Q 2022-2023, but saw its adjusted net income dip 3% y-o-y to EGP 104.7 mn.
  • SCTS’ net income rose 43.9% y-o-y to EGP 411 mn during the quarter, according to an EGX disclosure.
  • CAED saw its net income inch up 2.8% y-o-y in 1Q 2022-2023 to 9.2 mn, according to a disclosure to the bourse.
  • Taaleem reported a 34% y-o-y increase in revenues to EGP 230 mn, while net income rose 50% y-o-y to EGP 108 mn, according to its earnings release (pdf).

Even with the devaluation, education providers should be able to maintain their margins: The EGP has lost nearly half of its value against the greenback over the past year and is down almost 20% since the start of the year, while inflation came in at 25.8% y-o-y in January. However, the impact of inflation and the EGP devaluation should have already begun to show on the companies’ performance. Although schools are still broadly limited to a 7% annual increase in tuition fees, “this should be sufficient to offset increased costs for the current year and next to maintain normal margins,” Adel said. Salaries are typically the biggest bulk of any education player’s costs, so while expat salaries could present an increased cost burden, “this will likely have a minimal impact on margins” and will mostly be offset by tuition fees and higher classroom utilization, Adel said.

So, what does the future hold for education stocks? Education companies have been performing well, with strong bottomline and topline figures for the first quarter of their fiscal year, which means the rest of the year’s performance is easy to predict based on relatively fixed student numbers and tuition income, Adel said. For education players, their main asset is in this visibility — unless there are major structural changes, it is unlikely there will be any surprises in the stock story. “The biggest advantage in the education sector is that companies can easily maintain growth and margins as long as they maintain good quality of education, which will ensure good return on investment,” he said.

Your top education stories for the week:

  • Teacher recruitment spree: The Education Ministry is looking to hire 30k primary school assistant teachers for the first, second and third grades to start in the 2023-2024 academic year.
  • Public schools and universities are back in session: The second semester of the 2022-2023 academic year kicked off at the start of this week.

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