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Monday, 6 June 2022

As a sector, the normally-defensive education industry is tracking the wider market

In times of crisis (or when the going simply gets tough), plenty of investors look to so-called “defensive” sectors — shares of companies that are a bit less likely to fall off a cliff at the first sign that an economy might catch a cold. Defensive stocks may not offer crazy price appreciation, but conventional wisdom has it that a “good” defensive name is one in which you’re a lot less likely to lose your shirt when the stock market goes south.

Among the shares investors tend to think of as “defensive”: Education, alongside healthcare and some consumer staples — companies that produce food, beverages and other things people need to buy every day, regardless of how well the economy is doing.

The problem here in Omm El Donia: Education shares haven’t exactly lived up to their reputation. Four issuers are badged as education by the EGX. They’re moving in tandem with the wider market — down 16.0% year-to-date according to EGX data, compared to -16.4% for the benchmark EGX 30 in the same period. By comparison, the sector weathered the storm that was the peak of covid-19.

How does that compare to other defensive industries? EGX-listed healthcare and pharma shares are together down 13.0% year-to-date, while food, beverages, and tobacco is down just 8.1%. EGX-listed banks — not a defensive sector, but broadly considered a bellwether for the economy — are down 17.1% YTD.

Let’s dive a bit deeper: Meet Egypt’s listed education companies. Industry leader CIRA operates K-12 schools Mavericks and Futures, as well as Badr University, and leads the sector with a market cap of some EGP 7 bn. Then there’s Cairo for Educational Services (CAED, a CIRA subsidiary), the Suez Canal Company for Technology Settling (SCTS, which owns and operates the Sixth of October University) and Taaleem Management Services, which operates a university brand.

Taaleem has led the plunge. The company, which made its EGX debut last year, led all decliners in the sector by a wide margin, with its shares down 50.4% year-to-date, according to market data. CIRA shares are down just 10.8% after a strong rally in mid-April (beating the EGX30’s YTD return of -16.4%), while SCTS is down 13.7% YTD. The much more illiquid CAED bucked the trend, gaining 16.1% so far this year.

How does this correlate to earnings quality?

  • CIRA’s bottom line rose 20% y-o-y to EGP 299 mn during 1H 2021-2022 (September-February), while its revenues were up 24.4% y-o-y to EGP 944 mn, according to its earnings release (pdf) for the period.
  • SCTS reported (pdf) a slight 1.7% y-o-y increase in its bottom line in its most recent quarter to EGP 218.76 mn, while revenues inched up 2.9% y-o-y to EGP 307.57 mn.
  • CAED saw net income rise 11.4% y-o-y in 2Q 2021-2022 to EGP 11.12 mn, while its revenues rose 16.9% y-o-y to EGP 28.62 mn, its financials (pdf) show.
  • Taaleem saw a muted 8% y-o-y increase in its bottom line in 1H 2021-2022, sapped by a weaker second quarter. Revenue was up 5% year-on-year in the half to EGP 334 mn.

Education providers admit they’ve been squeezed by higher prices: We reported back in February on private schools’ struggles meeting additional CAPEX costs on the back of rising inflation. CIRA, for example, faced higher direct operating costs during 1H 2021-2022, including higher wages, maintenance costs, and other expenses related to its newly developed schools, according to its earnings release (pdf). At the same time, the company previously said that it has “been diligent in implementing an effective cost control model across all of our business units to mitigate the effect of current global and local economic conditions on our operations.” For Taaleem, the strategy has been similar, despite its weaker earnings turnout. The company imposed cost controls to maintain its margins, as Nahda University in Beni Suef saw a slight fall in enrollment, it said in its earnings statement.


Your top education stories for the week:

  • The Education Ministry has signed a cooperation protocol with the Federation of Egyptian Industries’ food division to upskill students in food processing and agriculture.
  • Some British universities are looking to increase academic cooperation and investment in our higher education sector.
  • FRA affiliate Egyptian Institute of Directors (EIoD) has launched its first masters program for healthcare sector governance (pdf), with the aim of improving healthcare firms’ access to funding.

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