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Navitas Guidance Reflects Confidence

Australia | Apr 05 2017

Navitas has briefed investors on its commitment to building partnerships with universities and its focus on industry-based tertiary education.

-Financial goals out to FY20 could be conservative
-But market likely to await execution on the targets
-Structural tailwinds continue for core university business


By Eva Brocklehurst

Navitas ((NVT)) remains intent on building partnerships with universities and being involved in industry-focused tertiary education.

The company has briefed investors on its long-term strategic direction and provided financial goals out to FY20. Compound growth in revenue of 3% is forecast with university programs up 7% and the SAE division up 3%.

FY20 operating earnings (EBITDA) margins are expected to be 18% for the group. Management has confirmed that the loss of contracts in the Adult Migrant English Program (AMEP) will impact earnings by -$12-14m from FY18 onwards.

Deutsche Bank's updated forecasts for FY20 fall slightly below the company's guidance, with its forecast revenue 2.5% below and earnings 3% below the values implied by the company's targets. Given the continued risks associated with contract losses the broker remains comfortable with this position.

Deutsche Bank estimates that revenues will fall for the PEP division (which now incorporates AMEP) by 30% in FY18 as a result of lost contracts, and the earnings margin slip to 10.5% in FY18 from 14.5% in FY17.

Tough UK, US Environment

The broker highlights the tough regulatory environment in the US and the UK, with the US continuing to be affected by a sector-wide increase in visa rejection rates and the UK affected by ongoing restrictive student visas. The company is hopeful these restrictions will increase the flow of students into Australia and Canada.

Macquarie envisages significant upside to revenue growth targets, assessing these as conservative. The broker forecasts a higher growth rate, 3%, in terms of course prices compared with the company's 2% estimate, underpinned by industry feedback which highlights the strong inelasticity in demand.

The broker also expects significant upside potential from new contracts, new courses and scope for better enrolment growth. Macquarie envisages uncertainty surrounding the SAE business will have eased because of the provision of growth targets and strategic detail. Growth assumptions for SAE are increased and the broker adopts the company's 3% revenue growth target.

Navitas has expressed confidence that all 2017 contracts will be renewed. Macquarie considers the risk for more university pathway contract losses, an ongoing concern for prospective investors, is significantly reduced.

The most important feature of the investor briefing for Morgan Stanley is unchanged earnings guidance that suggests FY17 earnings will be in line with FY16 on a constant currency basis. Also unchanged is the estimated impact from the loss of the recent AMEP contract. The revenue growth targets are lower than Morgan Stanley's prior estimates while the margin targets are better.

The good news is that the loss of the Macquarie University contract is now out of the numbers and in the past. Morgan Stanley believes this was the most profitable contract in university programs and the company has worked hard to fill the subsequent earnings gap, which is why FY16-17 earnings is flat rather than sharply lower.

Upside Possible If Targets Met

If the company achieves its objectives, all else being equal, the broker estimates this could add $0.50 to $1.00 per share to discounted cash flow value. Morgan Stanley suspects the market will take a conservative approach to pricing in the upside and await further evidence of execution.

Valuation is not considered overly cheap compared with other growth stocks in the media/internet/technology sector. The broker suspects the opportunity for a substantial re-rating will eventuate if the company can return to double-digit growth in earnings per share.

Morgan Stanley asserts the company's traditional and core business, university programs, remains an excellent asset that is profitable, with structural tailwinds as well as being globally scalable. The outlook for this division remains the driver of earnings and valuation for the broker.

The Australian-based business has 35 pathway colleges/campuses across Australia, the UK, the US, Canada, Singapore, New Zealand and Sri Lanka.

FNArena's database shows two Buy recommendations, two Hold and one Sell. The consensus target is $4.63, signalling 5.2% upside to the last share price. Targets range from $4.00 (Credit Suisse) to $5.00 (Macquarie).

See also, Major Setback For Navitas? on March 8, 2017.

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