Private school group Alpha Plus Holdings plc is seeking to raise between £40m and £55m through the launch of a retail bond. Alpha Plus owns and manages 12 independent schools, 2 nurseries and 5 sixth form colleges.
The bonds are being issued by the Company through a number of authorised distributors such as Selftrade and Interactive Investor and will trade on the London Stock Exchange’s electronic Order Book for Retail Bonds (ORB) which offers continuous two-way pricing for trading in retail-size corporate bonds. The book closes on December 11th and the bonds are expected to start trading on December 18th.
The bonds which pay interest semi-annually carry a coupon of 5.75% and will mature in December 2019.
Alpha Plus is the first private company to launch a retail bond for the ORB market. Unlike other retail issues the bonds will be secured against a portfolio of the Company’s freehold property and other assets which may explain why they are being offered with a lower yield than recent bond issues by other property focussed groups such as St Modwen Properties plc (6.25%. 7/11/2019) and student accommodation provider UNITE Group plc (6.125%. 12/6/2020).
Alpha Plus generated sales of £57.8m (2011: £52.3) in the twelve months ended August 31st 2012 and earnings before interest and tax of £4.1m (2011: £4.4m). Finance costs decline to £1.4m (2011: £3.7m) leaving profit before tax up 115% at £2.6m (2011: £1.2m). Increased revenues were attributed to increased fee levels and to higher levels of enrolment.
Total tangible assets increased 10.2% to £109.1m (2011: £99m) as the company spent a net £12.3m on fixed assets which included £5.0m on a building redevelopment project at Hilden Grange School in Tonbridge, Kent and £0.8m to refurbish new premises for Rolfes Nursery in Oxford Gardens, London. The Company also spent a net £4.0m on fixtures and equipment including ICT.
The Company generated operating cash flow of £13.7m (2011: £10.3m) helped by an increase in student fees paid in advance of £13.8m (2011: £11.2m) and a rise in trade payables to £2.4m (2011: £765k). However, operating cash flows were fully offset by spending on property, plant and equipment of £12.3m (2011: £10.8m) and net interest costs.
The Company plans to spend more on capital expenditure in the next few years than it estimates it can generate from operating cash flows highlighting how capital intensive the private school market can be and how tight margins are in the UK market. Operating margins were just 3.6% in the year down from 4.2% a year earlier. Returns on tangible assets were just 3.7% down from 4.4% a year earlier.
Pre-tax returns on shareholder’s funds (net assets) were higher at 12.2% thanks in large part to the the Company's existing loans which produce a leveraged return. On a risk adjusted basis returns are modest whoch explains why acquirers need to be prudent when valuing school businesses.
Alpha Plus has seen revenues rise 64% since 2008, whilst pupil numbers at its schools and colleges have increased by 29.5% to 3,625 in the same period. Average fees have risen 25.2% in the same period to £15,966. Academically, Alpha Plus is an outstanding performer as evidenced by Ofsted inspection reports and the 46% of its A level students who achieve an A or A* compared to the national average of 18.9%. The Company intends to make further acquisitions in London and the South East where it believes it can earn higher fees and better margins.
In total properties with a trading value of £84.4m and an alternative use-value of £62.75m have been offered as security on the bonds. These include Pembridge Hall School and Wetherby School in west London. LTV as measured by the maximum value of the bond issuance to the estimated trading value of the pledged properties is 65%.
Alpha Plus is also pledging cash and cash equivalent investments (broadly UK Government or European Investment Bank securities) of a value of up to 30% of all assets charged as security for the bonds. In addition, bondholders also benefit from a first fixed charge over any insurance contracts and registered trade-marks such as “Pembridge Hall” and “Wetherby School”.
The first £40m of the proceeds from the bond issue will be used to repay monies borrowed from Alpha Plus’s parent company, a Virgin Island registered entity. The next £5m raised will be retained in the business with any extra amounts raised above £45m being used to repay inter-company borrowings. Alpha Plus’s parent company will use the proceeds to repay third party bank funding which falls due at the end of 2013.
The Company’s portfolio of schools has been independently valued as fully equipped trading entities at £130m by Gerald Eve. This value has then been apportioned across the various properties and a sub-set of these properties have been pledged as security with a trading value of £84.4m.
Following a cursory glance we believe the trading value to be excessive. It represents a 27% premium to the net book value of the freehold and leasehold property as shown in the latest accounts. Furthermore, it represents 16x the Company’s EBITDA (Earnings before interest and tax, depreciation and amortisation) and 31x the Company last reported earnings before interest and tax.
Bondholders will draw some comfort from the 1.1 cover on the deemed alternative use value which is largely based on residential values and the other charges and pledges being offered.
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