Australia | Feb 02 2017
Education provider Navitas has cleared the headwinds brought about by the loss of its Macquarie University contract and brokers respond with several upgrades.
-Concerns over further contract losses allayed
-University more central in the JV structure
-Scope for further capital management?
By Eva Brocklehurst
Education provider Navitas ((NVT)) has finally cleared the headwinds created by the closure of its Macquarie University program over a year ago, and brokers have responded with several upgrades to ratings.
The first half result was messy but in line with Credit Suisse expectations at the headline. First half operating earnings of $76.6m were down 7.5% on the prior corresponding half, primarily from campus closures and currency headwinds. Guidance for FY17 suggests operating earnings (EBITDA) will be flat, ex currency, at the group level.
Credit Suisse expects university partnerships will return to growth in the second half. Further rationalisation of colleges and a possible review of the remaining assets within the professional and English programs could provide scope for further capital management, the broker contends. Credit Suisse upgrades to Neutral from Underperform on valuation grounds because of the recent share price weakness.
The result was in line with Deutsche Bank's expectations at the net profit and EBITDA levels but revenue was well below forecasts. Nevertheless this revenue weakness was offset by significantly better cost performance.
The broker is wary about the step-up in net debt and the low cash conversion during what is still, effectively, a period of transition. The company has confirmed a buy-back will resume, which Deutsche Bank suggests should provide some support for the share price.
Strong International Student Growth
Macquarie upgrades to Outperform from Neutral, believing the company will benefit from strong, long-term international student growth. This should be underpinned by steady fee growth and the additional margin benefits of increased scale and efficiency. The broker forecasts FY18 and FY19 EBITDA growth of 8% and 7% respectively, driven by a respective 10% and 8% growth in the core university partnership division.
Fears of further contract losses have been allayed, following a run of renewals. Macquarie expects all contracts due for expiry in 2017 will be successfully renewed. Regulatory risk is also reduced, with favourable government sentiment in Australia and Canada.
Moreover, international education is economically important in the US and UK, where it contributes US$34bn and GBP15bn annually, and the broker suggests this provides a safeguard against overly adverse policy shifts.
Macquarie expects the decline in UK enrolments will cease and be followed by a period of low growth. Muted growth is expected in the US.
A positive aspect, in the broker's opinion, is the company's exposure to lower-ranked universities which are suspected to be more reliant on its services. Macquarie also believes the joint-venture structure allays concerns held by higher-ranked universities over outsourcing university programs as, under a JV structure, the university will be more central in the maintenance of standards and ultimately in the protection of its brand.
Is The Share Price Full?
The broker considers Navitas large and competent enough to withstand increased government scrutiny of the various courses on offer and their eligibility for loans. Demand is expected to lift as weaker competitors fall by the wayside. The broker also believes the company has a good chance of lobbying for an amendment to the loan cap on nursing, a key employment growth area.
Morgan Stanley is pleased there is finally clear air ahead for Navitas. The debate for the broker now centres on the level of sustainable growth and the right multiple to pay for this growth. Guidance suggests growth levels are robust but the broker notes this also comes with a wider risk profile than existed in the past.
Morgan Stanley believes the current price/earnings ratio of 20x on FY17 estimates, and 18x on FY18 estimates, is relatively full. Therefore, an Equal-weight recommendation is retained.
UBS upgrades to Buy from Neutral. With the transition from the loss of the Macquarie University contract largely completed, and the recent addition of another US college, the broker believes the market can renew its focus on the potential growth in earnings and the other attractive attributes of the stock. These include a high return on capital, strong cash flow conversion and a low-geared balance sheet.
FNArena's database contains two Buy and three Hold ratings. The consensus target is $5.03, suggesting 10.9% upside to the last share price. Targets range from $4.40 (Credit Suisse) to $5.30 (Deutsche Bank). The dividend yield on FY17 and FY18 estimates is 4.4% and 4.6% respectively.
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