Australia | Feb 08 2019
Global expansion and investment in the digital platform are expected to underpin substantial growth for IDP Education, as it takes advantage of aspirations for quality education.
-Valuation acknowledged to be "lofty" and "stretched"
-However, business is defensive and there are substantial opportunities to take share
-Digital platform provides significant potential upside
By Eva Brocklehurst
Growth rates at IDP Education ((IEL)) impressed brokers in the first half, the results revealing a stellar performance across all divisions. Operating earnings (EBITDA) were up 33% and net profit up 32%. Highlights included IELTS (International English Language Testing System) up 20%, student placement up 40% and English teaching up 20%.
The investment in the company's digital platform is nearly complete and this is expected to generate leads, qualification and conversion to students over time. Computer-delivered testing is also rolling out, expected to increase IELTS volumes and prices over time.
The strong results were spread across many jurisdictions and boosted by macro tailwinds, a rare combination Morgans points out. Macquarie agrees the benefits of a diversification strategy are increasingly evident, and this positions the company to capitalise on the cyclically of global student flows.
As an example, weaker China/Australian volumes are more than offset by strength in the UK. The broker believes IDP Education is well positioned to benefit from student mobility, while digital channels will also improve unit economics.
The company is seen investing ahead of the curve in that regard and, while multiples appear elevated in the near term, Macquarie expects valuation will normalise over time. Morgan Stanley concurs, assuming strongest sales growth in FY20 and beyond, with a measured uplift in margin that implies a step up in reinvestment.
There are few reasons why the company cannot capitalise on the opportunities ahead, and Ord Minnett, while acknowledging valuation is "lofty", considers the stock "irresistible", upgrading to Accumulate from Hold.
UBS is not so inclined, downgrading to Sell from Neutral because of the stretched valuation. Also, given concerns around the Australian economy, the broker notes investors appear to be ascribing a premium for international-driven growth.
UBS accepts there is a real opportunity to take market share and the business is hard to fault, particularly given its defensive characteristics, as increasing wealth in developing countries is leading to demand for developed country education.
The broker's analysis of visas indicates favourable conditions should continue over the next 12 months. Student placement should benefit from stronger prices, contract renegotiations and favourable product mix.
Nevertheless, UBS believes the international student growth rate will become increasingly difficult to maintain, as China's declining 18-22-year-old population is a headwind until 2022 and developing countries are increasingly investing in their own education. The British Council, a partner in IELTS, forecasts outbound international student enrolment growth to slow to 1.7% out to 2027, after enjoying growth of over 5% in the last decade.
Several brokers point out that the digital platform is yet to contribute to growth. Early returns show a 40% increase in web traffic and a 46% increase in online leads. Computer-based IELTS is now available in 23 countries. This digital transformation is expected to set the company up as a market leader in student migration.
India was a highlight of the first half result and is set to be the main reason for the expected momentum over coming years, as a large tertiary aged population and an aspirational middle-class drive the migration of students.
A feature of the company's commentary was the scope for expansion. New offices are being rolled out in Pakistan and Nigeria is expected to be added to the list of countries by FY20. These countries have a combined population of nearly 400m and underdeveloped tertiary sectors.
The company also expects to open up more destination markets for Chinese students in Canada and, potentially, the US. India remains the only geography where IDP Education offers all six destinations to students, further highlighting the long-term growth potential.
FNArena's database shows three Buy ratings, one Hold (Morgans) and one Sell (UBS). The consensus target is $14.53, suggesting 5.5% upside to the last share price. This compares with $10.74 ahead of the report. Targets range from $12.90 (UBS) to $16.00 (Morgan Stanley).
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