{"id":573932,"date":"2020-08-24T03:59:26","date_gmt":"2020-08-24T03:59:26","guid":{"rendered":"https:\/\/enterpriseam.com\/egypt\/blackboards\/education-proves-its-defensive-mettle-in-the-face-of-covid-19-on-the-capex-side\/"},"modified":"2020-08-24T03:59:26","modified_gmt":"2020-08-24T03:59:26","slug":"education-proves-its-defensive-mettle-in-the-face-of-covid-19-on-the-capex-side","status":"publish","type":"blackboard","link":"https:\/\/enterpriseam.com\/egypt\/blackboards\/education-proves-its-defensive-mettle-in-the-face-of-covid-19-on-the-capex-side\/","title":{"rendered":"Education proves its defensive mettle in the face of covid-19 on the CAPEX-side"},"content":{"rendered":"

<\/a> Education proves its defensive mettle in the face of covid-19 on the CAPEX side:<\/strong> Earlier<\/a>this month<\/a>, we looked at how education stocks have weathered the covid-19 storm in equity markets that has dragged down other industries, underscoring its position as a defensive sector. Now, we\u2019re looking at how education investments on the ground have been faring, and whether the pandemic and the resulting lockdown had adversely affected capital expenditure (CAPEX). We\u2019ve put that question to some of the biggest investors and operators in the sector, including CIRA, AIS, El Alsson and GEMS.<\/p>\n

What we\u2019ve found is that overall CAPEX investment remains steady, despite some delays in execution. <\/strong>Social distancing, extra costs, and delays in procuring supplies slowed planned construction of new school buildings and facilities this year, private school representatives tell Enterprise. But investment and CAPEX spending haven\u2019t been frozen, and are expected to grow as demand for new schools stays high. Covid-19\u2019s impact has been largely felt in operating expenditure (OPEX) spending, which has increased due to safety protocols.<\/p>\n

The pandemic has not derailed GEMS\u2019 investment plans:<\/strong> GEMS manages four schools in Egypt, with a student capacity of 7k, which it planned to grow to 20 schools able to accommodate 20k students in three to five years, CEO Ahmed Wahby tells Enterprise. \u201cThese expansion plans haven\u2019t changed. We remain positive about Egypt as a market, and intend to grow our presence here.\u201d Wahby expects total investment to stay in the range of USD 200-250 mn. \u201cThere\u2019s been no investment freeze,\u201d he says.<\/p>\n

AIS\u2019 CAPEX investment was already on hold pre-covid, and the pandemic is not a big factor in deciding when to resume expansion<\/strong>, says Tammam Abushakra, advisor to the Chairman of ESOL Education<\/a>, which owns AIS. Covid has no long-term bearing on the school\u2019s CAPEX or investment plans, although it may have had a short-term impact on expansion, he says. \u201cHad covid not happened \u2026 maybe by now we\u2019d have been moving on a new project. But long-term, our view is still very bullish, very positive for Egypt.\u201d A 2015 plan<\/a> to partner with Emaar to open an AIS campus in Uptown was put on hold indefinitely before covid hit, but there\u2019s high demand among real estate companies to develop new AIS schools, he says. \u201cWe\u2019d consider new investment, and we\u2019re optimistic about Egypt\u2019s future as a market and country.\u201d<\/p>\n

CIRA says its expansion plans are proceeding normally:<\/strong> CIRA\u2019s total investment in non-current assets was just over EGP 1.7 bn<\/a> as of May 2020, up from EGP 931 mn<\/a> in May 2019, according to the company\u2019s earnings release. Last month, El Kalla stressed<\/a> that the pandemic had not slowed down expansion plans. \u201cEverything\u2019s still on track, and we\u2019ve delivered on every single deadline since 2018,\u201d he tells Enterprise. CIRA signed a EUR 25 mn<\/a> agreement with the European Bank for Reconstruction and Development last year to establish a new university in Assiut\u2019s Nasser City. In December 2019, CEO Mohamed El Kalla said it would invest<\/a> more than EGP 2 bn to develop several ongoing and future projects.<\/p>\n

Some schools saw delays to their construction schedules: <\/strong>Covid-19 required GEMS to add 2-3 months to its timeframe for summer renovations and the building of a new international school, says Wahby. CIRA planned to launch seven new faculties at Badr University this year \u2014 which it finished pre-covid \u2014 and build a school in New Mansoura, which was 48 days behind schedule by April, says El Kalla. It gathered resources and is now on track to open on time, aided by the late start to the academic year. The New Mansoura school was slated to open<\/a> in September 2020, as of January this year.<\/p>\n

As social distancing measures lessened, they started making up for lost time. <\/strong>As post-lockdown business operations resumed, schools took steps to accelerate the pace of construction. For CIRA, this meant running two separate shifts over a 24-hour period, so the site was functioning around the clock. GEMS looked at different design options, increased the cash flow to purchase items early, carefully planned the import of raw materials and equipment, and maintained strong relationships with suppliers.<\/p>\n

But what covid has done is increase OPEX: <\/strong>While for the most part, capital expenditures \u2014 investment in revenue-generating projects and facilities \u2014 has remained steady, cost of goods and operating expenses has increased as a result of covid-19. These include spending on things such as sanitizers and masks.<\/p>\n

El Alsson had to increase spending this year by 15-20%<\/strong>, Executive Director Karim Rogers tells us. These additional costs are in the hundreds of thousands, not mns, but they are significant. \u201cI\u2019ve just spent EGP 100k on thermometers alone,\u201d says Rogers, \u201cbut it\u2019s essential for us to reopen safely.\u201d<\/p>\n

The pandemic has driven the cost of goods and services (COGS) up for CIRA as well, and fast-tracked maintenance costs.<\/strong> Sanitation measures have added 5-7% in COGS, and maintenance costs have been fast tracked by some 25% for at least two years, says El Kalla.<\/p>\n

AIS\u2019 biggest covid-related spending increase is OPEX, says Abushakra.<\/strong> Much of this goes towards staffing costs, with the school recruiting new teaching assistants to help meet students\u2019 needs. Abushakra doesn\u2019t consider these expenses to constitute a big hit for a school of AIS\u2019 size.<\/p>\n

In GEMS\u2019 case, spending on items that could be classified as CAPEX increased along with OPEX. <\/strong>GEMS saw an extra 15-20% rise in CAPEX \u2014 thanks to covid-19 safety measures. GEMS\u2019 core renovation program saw additional covid investments, with new isolation rooms and extra levels of sanitization. CAPEX and OPEX spending had to increase by about 30-40% to get things under control, says Wahby, along with the extra cost of safety measures to ensure social distancing and provide PPE at the construction site.<\/p>\n

While investments haven\u2019t been impacted, covid-19 is forcing a rethink of what type of projects are essential: <\/strong>\u201cInvestment in education is essential for the economy, and the government encourages it, but individual investors and schools need to decide which investments are worthwhile,\u201d says Rogers. Schools will weigh expansion plans against the economic risks posed by covid-19, as their needs depend on their business models. So CIRA is strategically positioning itself, building quality international schools in undeveloped areas, while investment is continuing in new schools like the Manhattan School or Harvard School, he believes. \u201cI think newer schools will need to finish their investments, while most established schools will be reviewing their budgets carefully because of the economic uncertainty. Newer schools need to recruit students; we don\u2019t,\u201d he adds.<\/p>\n

Ultimately, soaring demand for educational services is the key factor driving investment \u2014 and it isn\u2019t going anywhere.<\/strong> AIS\u2019 enrollment this year has actually exceeded projections, especially with an influx of Egyptian families returning from the Gulf, seeking international education for their children, says Abushakra. Meanwhile, El Kalla believes that despite delays in investment \u2014 especially for new operators \u2014 ongoing demand will render economic turbulence a temporary blip.<\/p>\n

The bottom line? CAPEX investment will likely continue growing to meet demand for physical expansion, even as other costs stay high. <\/strong>Wahby is still hearing of a lot of greenfield activity, and doesn\u2019t expect this to change anytime soon. \u201cThe cost of constructing a school could be higher, but you don\u2019t stop production,\u201d he says.<\/p>\n

But in an economic downturn, do high costs show<\/strong> foreign ownership limits (FOL)<\/strong> as a constraint that should be revised? Yes, says El Kalla.<\/strong> Last year, the government signaled its intention to impose a 20% cap<\/a> on foreign ownership of Egyptian private schools, with one private equity firm then rethinking a planned investment of over USD 100 mn in K-12 schools, it told Enterprise at the time<\/a>. This cap should definitely be reconsidered for reputable companies with a track record in education, says El Kalla. \u201cEgypt needs FDI, without question,\u201d he says. He urges a review of this quota for companies wishing to establish private schools in areas with low representation, such as Upper Egypt or the Delta.<\/p>\n

While the intent behind FOL regulation is sound, its execution and exemption processes need to be faster, says Wahby. <\/strong>\u201cFOL is important, but having only the regulation without the right exemption process is crippling to investment,\u201d he says.<\/p>\n","protected":false},"excerpt":{"rendered":"

Education proves its defensive mettle in the face of covid-19 on the CAPEX side: Earlierthis month, we looked at how education stocks have weathered the covid-19 storm in equity markets that has dragged down other industries, underscoring its position as a defensive sector. Now, we\u2019re looking at how education investments on the ground have been […]<\/p>\n","protected":false},"featured_media":573933,"template":"","categories":[],"tags":[736,737,402,908,179,72,1929,125,909,619,910,5753,5754,5755,738],"class_list":["post-573932","blackboard","type-blackboard","status-publish","has-post-thumbnail","hentry","tag-ahmed-wahby","tag-ais","tag-cira-education","tag-el-alsson","tag-enterprise-blackboard","tag-enterpriseam","tag-gems","tag-investment-watch","tag-karim-rogers","tag-mohamed-el-kalla","tag-opex","tag-physical-expansion","tag-school-buildings","tag-school-facilities","tag-tammam-abushakra","wpautop","entry"],"acf":{"mongo_id":"1cb5ef4c-9924-4eff-b357-39b72d5a79d2","is_powered_by":true,"section_story_id":"e6beb36f-0f99-446b-bfe7-b19eb0223381","story_type":"2","photo_url":"https:\/\/ent.news\/2020\/8\/183.jpg","photo_position":"above","related_issue":[573908],"teaser":"","voice_url":""},"yoast_head":"\nEducation proves its defensive mettle in the face of covid-19 on the CAPEX-side - EnterpriseAM Egypt<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/enterpriseam.com\/egypt\/blackboards\/education-proves-its-defensive-mettle-in-the-face-of-covid-19-on-the-capex-side\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Education proves its defensive mettle in the face of covid-19 on the CAPEX-side\" \/>\n<meta property=\"og:description\" content=\"Education proves its defensive mettle in the face of covid-19 on the CAPEX side: Earlierthis month, we looked at how education stocks have weathered the covid-19 storm in equity markets that has dragged down other industries, underscoring its position as a defensive sector. 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