Today’s Trading Playbook
Cairo for Investment & Real Estate Development [CIRA] reported its 9M 2021/22 results, where net earnings saw a slight decline to EGP424mn (-0.5% y/y) mainly on a lower adjusted GPM of 65.9% (-390bps y/y) and higher net financing costs (+72% y/y) due to CIRA’s upcoming expansion plans and higher interest rates. The GPM decline was propelled by increasing costs of salaries, wages, utilities, and maintenance, in addition to other costs related to CIRA’s new schools. However, the lower G&A-to-sales ratio (-205bps y/y) partially offset the increasing cost of sales, which resulted in a narrower decline in adjusted EBITDA margin of 56.4% (-173bps y/y), adjusted for an EGP7.3mn one-off pre-operating expenses related to BCCIS West & SIS schools. Certain cost items, particularly salaries, indicate that licensed tuition fee hikes will be necessary to offset inflationary growth. However, this will be done accompanied by financial solutions tailored to students’ families.
Revenues, however, witnessed a growth of 15.3% y/y during 9M 2021/22 to EGP1.5bn. The growth in revenues was propelled by an increase in tuition revenues (representing 94% of revenues) for both K-12 (+16.9% y/y) and Higher-Ed (+17.9% y/y) segments. CIRA’s students’ enrollments and tuition fees during the period grew 8.2% y/y and 8.6% y/y, respectively, resulting in the higher tuition revenues.
Moreover, Higher-Ed pupil-to-teacher (PTR) ratio was boosted from 15.1x in 9M 2020/21 to 15.8x in 9M 2021/22. This happened mainly due to a higher increase in students than teaching staff. As management is aiming to hire more teaching staff, they are targeting a PTR ratio of 15.3-15.4x in this segment. Moreover, utilization rates dropped 19pp to 56% due to the newly-added faculties of BUC, which just started this year. However, management expects to see a ramp-up in utilization rates next year as BUC is now fully operational. The same was for the K-12 segment, where the utilization rate dropped to 91% vs. 95% last year due to the newly-added schools. PTR for this segment was nearly flat at 11.3x (-0.1x).
From a quarterly perspective, Q3 2021/22 saw its bottom line weaken by 28% y/y in view of limited top line growth of 1.7% to EGP520mn. We note that GPM has narrowed notably, whereas higher borrowing costs and a higher effective tax rate pressured the bottom line, leading NPM to shrink to 27.0% (-11.3pp).
Generally, the quarter came below our estimates, failing to deliver on expectations. However, we continue to have a positive outlook on CIRA in view of its promising expansion plan. Management said that CIRA will begin to accept applications for Badr University in Assiut (BUA) by August, with the launch of six faculties by the beginning of the coming academic year, as CIRA obtained the required licenses. The outlook for volume growth in 2022/23 remains upbeat, given the reversal of the centralized higher education admission system and an expected pool of 700,000 newly graduated high schoolers. While we expect volume growth to be strong, CIRA’s ability to carefully hike prices, coupled with receding inflation, will bring margins back on track. We remind you that we have an Overweight rating on CIRA with a 12MPT of EGP20.6/share (ETR +80%). We note that CIRA is currently traded at a TTM P/E of 21.7x. For more details, please check out our Core Coverage Report dated 23 May 2022.
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Nada Wagdy | Equity Analyst