IDP Education--a small bump in the road?--new position

 IDP Education – a small bump in the road?

Understandable business

IEL business comprises two businesses, IELTS (English language test) and Student Placements.

IELTS was effectively a monopoly with the test being regarded as the best for students to qualify for course approval etc. Competition has emerged around the world with Aust in 2014, NZ 2016, UK 2021, and Canada 2024. The test appears to be holding its place as the top test. IEL acquired the British Council in India franchise in 2022 significantly expanding its exposure.

Student Placement arranges for students to undertake university courses. The universities pay IEL for the sourcing and clearing of regulatory issues such as visas.

Both streams are significant with IELTS growing by an average of 15% over the last 10 years, including the acquisition, while SP has grown 25%ps. GP has averaged 84% for SP and 43% for IELTS over the last 10 years. SP had a GP of $300 fy23 and IELTS of $263m. SP volumes have been 15% cagr and price increases 6% for SP over the last 10 years.

The demand is considered very strong with regulatory and other restrictions being the issue.

In the fy23 results, IEL estimated that the annual international student volumes were 1.8m for the countries it services being, Aust 325k, UK 480k, Canada 480k, USA 450k, NZ 40k and Ireland 22K. In the FH24 results it estimated that IEl had a market share of 14% in Australia, 5% in the UK and Canada, and 1% in the US. The market is growing and IEL share is reasonably low.

The main sourcing of students has been from India 43-53%, China 10-24%, Aust 6-7% and Vietnam 5%. The main destinations are Aust 36-47%, UK 22-30%, Canada 22-27%. The variations have come from regulatory changes and C19 impacts. As can be seen, the SP is mainly Indian and Chinese students going to the three large countries to study. IELTS especially post acquisition is exposed to India.

The current issue is that student volumes exploded higher over the last couple of years and the respective governments have put in restrictions varying from country to country. Canada appears the most severe as it had the largest increase. Therefore the industry is set for a reset. The rules mainly restrict non-genuine students, limit work during and after study, Canada has out caps on volumes in 2024 and 2025 etc.

In the FH24 result IEL put a series of statistics indicating that the success rate for IEL students was well above industry averages. The numbers covered student placement volumes and visa approval rates for all students, India in particular and for Aust and Canada. The numbers showed a significant advantage to IEL.

IEL also appears a leader, mainly, I suspect, to Aust lead in selling education abroad, where the US lags. IEl describes its competitive advantage as Global Scale, encompassing digital courses and websites, physical scale esp global offices, and Trusted Experts, encompassing university relationships, independent educational specialists, expert examiners, and trusted brands. The success rate versus the competition is considered wide (lower rejections). The competition appears small and single country focussed.

Operating History

EPS growth has been 15-20% 5Y roll, except for C19 which seriously impacted the business. EPS stability has been r2 of 60%, but 87% once adjusted for C19.

ROE has averaged 37% over the last 9 years but has varied greatly with a low of 10% (C19) to a high of 55% and 20-30% post C19 and acquisitions. IEl is a very profitable business.

GM has averaged 55% over the last 10y, with a range of 49-62.5%. the high in 2023. Good margins and reasonable stability for the style of business.

Cash reconciles to NPAt with 3Y being 103% and 5Y 95%. The reinvestment rate is 68% which is high but is mainly all acquisitions with IELTS Indian acquisition and a smaller SP business Intake being almost all of it. The underlying business is very capital light with maintenance capex very low (22% of CFO over 9 years). Having said that TA has grown over 30% pa (5y rolls), healthy ability to reinvest.

The NPAT margin has averaged 11.25 over the last 10y, with a low of 9.7% and a high (2023) 15.2%. given the business is a middle man these numbers are sound. IEL is a very profitable business. there are signs that the high level of profitability in the most recent years could show over earning as the student numbers were well over the trend in especially Canada and Aust.

 

Management

Management has seen some disruption over the recent past. Both CEO and CFO have been replaced. The CEO is ex SEK and ABY. Perhaps IEL is entering a difficult time with regulations with an inexperienced team.

The other issue to raise was that the ex CEO is now on the board and was paid a large bonus (too big) in the past.

Balance Sheet

The balance sheet has traditionally been conservative, giving the business a good thing.  Interest cover has averaged 20X with a low of 13X and currently 17X. acquisitions are quickly paid off given the FCF generation.

During C19 the company was caught out and had to raise $254m at $10.65ps. IEl was particularly vulnerable during C19. That was the only dilution.

Other

The accounting here is straightforward. The business is understandable. The cash flows through the business.

The significant issues are the growth trajectory for the industry and the company. The industry outlook is probably more important and has to manage government policy settings that make ongoing student arrivals occur. The demand is expected to be ongoing and healthy. The industry is important to countries such as Australia and Canada. The restraint is immigration and infrastructure issues that could curb growth. The size and longevity of any restraints implemented by governments will impact the valuation of the business. the company appears well-placed as a premium operator in the industry.

The PE range has been 96-33X with an average of 47X and a std dev 17. Very high numbers. McNiven at an ongoing 30% ROE and 62% reinvestment give a PE of 22x, usually, McN is a conservative number.

 

CONCLUSION – VALUATION

The call here is reasonably clear, are the Government's restrictions, now and in the future, enough to end the great growth numbers we have seen with the industry? IEL is considered to remain a premium participant.

Although the short term is quite unclear with some signs of over-earning and a profitability reset for the industry and to a lesser extent IEL likely, given the importance of the industry and IEL’s position in the industry the LT growth path appears reasonable. Maybe that is not as good as before, but that is not certain.

The view is the Government action is to stem excessively high intakes so that the underlying growth path will resume and that IEL will be a major participant in that growth.

Under what I consider conservative assumptions of 5Y eps growth 11% pa and an exit multiple of 26X and 3% DY gives a 10% cagr at $16.24. Quality business, good balance sheet and FCF.

New position

 

Please note the disclaimer.