Australia | Aug 02 2017
Australia remains the key source of business for education provider Navitas but brokers expect weakness in the US and UK will stymie growth.
-Brokers divided over FY18 growth potential
-Deakin College contract renewed
-Stock considered a difficult investment in the near term
By Eva Brocklehurst
In FY17 education provider Navitas ((NVT)) again missed earnings forecasts on a number of fronts and provided no specific FY18 guidance. Operating earnings (EBITDA) will fall -$14m from the reduction in Adult Migrant Education Programs (AMEP) while there will be no income from those colleges which have been closed, Macquarie and Curtin Sydney.
On the positive side, enrolments in Australia and Canada were strong and offset declines in the US and UK. Australia remains the key source of business and an attractive destination for international students, although brokers expect weakness in the US in the UK will stymie growth.
The confirmation that the Deakin College contract has been renewed is considered a positive, as this is the largest contract in the university programs. Three more contracts are due for renewal this year and two more next year. University partnership enrolments rose by 8% in semester two, underpinned by 16% growth in Australasian colleges. Ex Australia, North American enrolments were flat and UK enrolments fell by -3%.
Outlook
The headwinds for FY18 from the lost university and AMEP contracts are larger than UBS was anticipating, although this is partially offset by higher implied underlying growth. UBS estimates underlying operating earnings growth of 12.5% in FY17. On this basis the broker suspects forecasts for earnings growth of 8% in FY19-21 could prove conservative.
Deutsche Bank makes changes to estimates to reflect the quantification of the impact from closing of colleges and the AMEP contract reductions and also continues to envisage underlying growth in the business, although does not believe it will be enough to offset the headwinds and forecasts a further decline in operating earnings in FY18.
Morgan Stanley observes the absence of guidance for FY18 is a departure from previous practice, although the company has reiterated FY20 financial targets. Consensus is looking for operating earnings growth in FY18 of 4.5% and growth in earnings per share of 5.4% but Morgan Stanley suspects this may prove optimistic.
Credit Suisse is also suggesting the earnings base is lower going forward than previously thought. The broker estimates the earnings base for FY18 sits around $130m, factoring in the impact of the loss of the AMEP contracts.
FY17 earnings per share were below FY11 and may take another step down in FY18. Credit Suisse questions whether a stock with a long track record of disappointing on earnings deserves a premium to the market, maintaining an Underperform rating.
Macquarie downgrades to Neutral from Outperform as, although industry conditions remain favourable and student enrolments are growing, the above-mentioned headwinds are specific to the company and affect FY18.
The broker also notes foreign exchange had a material adverse impact in FY17. Of the adverse revenue impact, $20m relates to the UK with the balance to the North American division. Separately, Macquarie increases depreciation forecasts for FY18 to reflect the elevated capital expenditure witnessed in prior years.
Of interest, the broker notes another contract with a UK partner will convert to a joint venture structure, although the timing is unclear. This would give rise to a non-cash gain or loss on conversion. There was a $17.3m non-cash gain on conversion of the Edith Cowan College to a joint venture.
Citi believes the normalisation of capital expenditure will drive cash flow generation from FY18 but a return to earnings growth is only likely from FY19. As well, the broker highlights the negative enrolment trends in the US.
Moelis, not one of the eight stockbrokers monitored daily on the FNArena database, expects another year of negative operating earnings growth in FY18, as the company will need to work hard to recoup the losses from the reduced AMEP contract. The stock is considered a difficult investment in the near term and the broker maintains a Hold rating and a $4.58 share price target.
There are five Hold ratings and one Sell (Credit Suisse) on the database. The consensus target is $4.48, suggesting 3.5% upside to the last share price. This compares with $4.83 ahead of the results. Targets range from $3.80 (Credit Suisse) to $4.95 (Morgan Stanley).
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