Hi Money makers,
It’s your favorite content creator, TalkingCents.
In today’s article, I’m going to unpack the 'future cost of school fees' and how you can prepare yourself for parenthood.
Future School Fees
While enrolling your child in a reputable and affluent schooling district can offer valuable networks, it comes at a considerable cost. On average, it can cost a household between R1.5 million to R4.2 million to put a single child through 12 years of private schooling, depending on where you decide to school.
The reality is that education plays a vital role in shaping your child's future. It not only equips them with practical skills essential for earning a living but also imparts valuable soft skills through social interactions. However, it’s also important to be realistic when considering what you can afford and how these costs will affect you going into the future.
Nonetheless, whatever you decide to do with your child and money is your prerogative, but one fact remains, you wont be able to escape the realities of the costs and trade-offs that come from your present decisions.
Annual Fees
The South African Reserve Bank (SARB) notes that, on average, the annual cost of education increases by inflation plus 2.6%, while historical inflation data generally sits around 5.4% to 5.6% on average
Let’s make sense of this:
Assuming an annual cost of R77,220.00 for a private primary school in 2024, the forecast indicates that by 2040, you would need R264,551.00 to meet the expenses for one child's education throughout the year. This projection is based on historical data, which suggests an average annual increase in school fees of approximately 8%.
In the table provided, you can see my highlighted example, along with various other schooling options and their corresponding increases during the same period.
What this means is that no matter what bracket of affordability you are in, there is no escape from annual school fee increases. This is largely due to the effect of money losing value over time, otherwise known as the Time Value of Money (TVM).
What makes this all worse is that wage growth, especially in South Africa, tends to fall short of keeping up with the increasing costs of life's necessities. It is probably why most of us feel like we just can’t keep up.
Planning Ahead
Whether you are entering into parenthood or planning to in the coming years, it’s important to understand that education will get more and more expensive as each subsequent year passes. Therefore, you should start saving and investing for your child’s education, today.
In a recent article, I explored the impact of long-term investing and the advantages of leveraging time in your favor. The article underscores the importance of considering this aspect in relation to the future expenses associated with your child's education.
Waiting until it's time for your child to begin school could pose serious financial challenges to future disposable income. Conversely, building up savings today and proactively anticipating your future financial commitments allows for better preparation.
"If this doesn't serve as your wake up call to get ready, then the future cost of responsibility catching you off guard rests squarely on your shoulders".
Investment Opportunities
It's evident that to maintain a competitive edge, one must recognize that relying solely on trading your time for income has limitations, and to bridge the gap between the rising living costs and your personal wage growth, it becomes essential to invest in equity.
To pick the potential winners we must understand the dynamics of TVM and and understand how certain industries are able to retain purchasing power over time.
Let’s take a look:
Pricing power refers to a company's ability to increase the prices of its goods or services without significantly impacting demand. This attribute is indicative of a company's competitive strength, as it suggests a strong brand, differentiated products, or a unique market position.
With that being said, I want to share a personal anecdotal story that will act as the prequel to this investment analysis.
Backdrop
I’m 20 years young and knocking on the front door of my investment journey, working from 6 am to 6pm for R2 200pm. I’ve got my youth in front of me with late nights and carefree mornings to look forward to.
The awareness that time is passing and will continue to pass by doesn't quite resonate with me at this age, yet. However, the true reality of life becomes apparent when my mother starts to experience financial hardship and eventually goes bankrupt. I only bring this up because, before this pivotal moment, I had enrolled in correspondence learning to further my studies.
I didn’t immediately grasp the sink-or-swim nature of this consequence. Instead, it finally struck me when my vision was blurred, I had only R700 in my pocket, and I found myself on my seventh drink and second shooter of the night.
It was clear that my peers and I danced for various reasons, my motivation was coated with agony because it dawned on me that every Rand I spent from this point onward was a Rand taken away from my education. I danced not just for the enjoyment anymore but also to salvage my future. One might say I danced with fate.
My point being, I became obsessed with education the moment I knew I was swimming in the deep. Don’t misinterpret me, I still threw my drinks back in my early twenties, but the only difference now was that I took note of my spending and planned when to do it.
Non-Negotiables
I became aware that certain aspects of life were non-negotiable for some people, including investing in education, ensuring one's child doesn't go hungry, and guaranteeing the safety of loved ones. After I danced with fate that night, I adopted the mindset that "education is recession-proof," and it shaped my life accordingly.
I invested my first bit of savings into learning about currency movements, I learnt how to squeeze profits out in order to keep enrolling for the next semester. I wasn't aiming to swim in wealth, but rather just to make enough to navigate through the next semester's tide.
Subsequently, I made my initial investment into two companies, with today's focus being on one - ADvTECH Limited. My mind gravitated toward the thinking of how “education is recession proof”, and I recognized the potential for private enterprises to excel in the gap left by the government's inability to adequately provide schooling.
So I did what I do best, I worked as hard as I could while also studying, I focused on my spending and redirected it into the most important aspects of my life. I had no concept of debt/EBITDA levels, what leverage was, or what an enterprise value meant.
All I had was the will to not sink and I left the rest to fate.
ADvTECH Limited ( $ADH )
The ADvTECH Group is Africa’s leading private education group, listed on the Johannesburg Stock Exchange (JSE). The company is actively engaged in the education and recruitment sectors, serving South Africa and other regions across the continent.
Investment case
As highlighted in an earlier article, navigating the South African market can be quite challenging. Opting for specific stocks in certain industries is most likely a better approach compared to investing in the overall index, which lags due to local economic conditions.
This stock picking approach is of course riskier than just playing it safe in an index, but is it really playing it safe when there is currency risk?
ADvTECH returned 38% in 2023, outpacing the the JSE-All Share index’s 0.3% and the TOP40 index’s 5.28%. In real terms, purchasing power was protected + sum.
Below is a chart provided by Bloomberg showing the gains of each respective JSE education stock VS the JSE-All Share Index for 2023.
Hindsight is 20/20
I’m no longer an ADvTECH shareholder, I sold my position a few years ago to fund my journey abroad. However, ADvTECH still ranks among the top three gains in my investment journey to date. Be it because of fate, discipline, or blind luck, it remains to be a stock that steered me to where I am today.
Looking back at 2023’s winners is of course the easy part, anticipating and predicting the future is the difficult part. We all look like geniuses in hindsight. However, I am now older, wiser, and more versed in finance, so I come better prepared.
Creating a Watchlist
Given the current stage in the cycle, the 2023 gains for this stock have been significant. Chasing it now may turn out to be foolish, but adding it to your watchlist is recommended as it remains a strong company with a long runway ahead.
Let’s look at the financials:
In the last seven years, both revenue and gross profit have more than doubled, indicating strong year-over-year growth. Even amid the height of the pandemic, the company achieved a 7.7% increase in revenue in 2020 and a 7.6% rise in 2021.
This underscores their superb management skills, cost cutting prudence, and competitive resilience in this market. This is evident in their sustained gross margins, which even slightly increased in the last twelve months (LTM).
The company has been reasonably effective in controlling their costs relative to their revenue, which is generally seen as a positive sign of financial health
Their operating expenses have increased in tandem with revenues, leading to higher operating income and sustained operating margins, indicating efficiency in managing its operations.
I won’t get too much into the fundamentals, I’ll save that for future articles. For the moment, I'd like to emphasize that our focus should be on companies capable of preserving purchasing power and operating in industries with growth prospects.
The South African Stock market is struggling, so that means capital will rotate out of winners and into neglected industries that are becoming more attractive. The goal would be to find these next cycle winners, but also to keep an eye on previous winners.
This market operates as a zero-sum game, implying that for one party to gain returns, another must incur losses, highlighting that strategic positioning is crucial.
This is why it’s important to avoid pursuing stocks that have experienced excessive rallies, as their fundamentals remain linked to the South African economy. Instead, monitor winners from the previous cycle and patiently await a significant pullback before establishing positions.
I will illustrate this in two charts:
Chart 1 is the long term chart of ADvTECH
Chart 2 is the technical side.
In the long run, the business appears promising, but it's crucial not to pay too much. In the short term, the stock has benefitted from a rally and seems set to retreat to the R16.50 - R20.00 range to retest the breakout zone from previous highs.
However, there's a risk of overextension to the downside if there is a broader market sell-off, implying that your margin of safety is not great enough to start building a position now.
I’d be a buyer of ADvTECH between R16-R20.
That’s it for now, chat soon.
Dave :)