We researched IDP Education (ASX:IEL) in The Dynamic Investor prior to Christmas and took a positive view on the stock fundamentals, as we felt that the valuation metrics had become more appealing. With the share price having since re-rated significantly, do current levels still present an attractive entry opportunity?
Overview Of IDP Education
IDP Education operates English testing as a co-owner of the largest global English proficiency test, International English Language Testing System (IELTS). The IELTS agreement runs under a co-ownership agreement between IEL, the British Council and Cambridge Assessment, in equal shares. IEL and the British Council are responsible for operating and distributing the test, while Cambridge Assessment designs/creates the test materials. This test is predominately focussed on applicants who use this test as a prerequisite for study, work and migration. IEL also receives a royalty fee (percentage of test fee) for IELTS tests conducted by British Council in China in return for British Council having exclusivity in this market.
The Company is also the largest international provider of student placements into tertiary educational institutions and is the largest student placement agent in Australia with ~23% market share.
Key Fundamental Drivers
Operating Leverage Expected to Continue
One of the highlights of the results for the 12 months to 30 June 2022 (FY22) was the improvement in gross profit margin (GPM) for both the IELTS and Student Placement segments. This was most notable in 2H22, where group GPM increased by 540 basis points. IELTS benefited from stronger synergies from the BC India acquisition in FY22 and despite a significant increase in operating expenditure, EBITDA margin still increased by ~80 basis points.
The increase in operating expenditure (which is driven by higher staffing costs) is being driven by network expansion in order to drive future earnings. Importantly, the Company has a track record of achieving operating leverage and remains disciplined to grow costs below revenue growth.
The higher GPM achieved in FY22 expected to be sustained into FY23 with incremental upside from higher volumes, especially in Student Placements. This is expected to translate into further operating leverage in FY23 and over the medium term, as:
i. IEL has the ability to implement price increases to offset inflationary pressures. To this end, further price increases are pushed through (i.e. 3% pricing growth across the IELTS network and associated tuition increases and >3% for Student Placements) and
ii. Further gains from investment in technology are achieved – notably from IELTS online & IDP Live.
Trend in Student Placement Volumes Remain Strong
Australian Student Placement volumes have taken a back seat to multi-destination student placements since COVID-19. However, with the outlook for Student Placement volumes in Australia to return to above pre-pandemic levels (~30,000) in FY23 (+39% to 20,100 in FY22), overall Student Placement volumes will be the key driver of revenue growth.
In terms of Multi-Destination Student Placements, volume growth was particularly strong across the key markets, with the exception of China. UK student placement volumes were up 36% to 16,100 (71% volumes delivered in 1H due to seasonality). Canadian volumes were up 50% (year-on-year) to 15,000 course enrolments, but were impacted by visa delays (which is largely a timing issue). Thailand, Vietnam, and India source market growth were particularly strong, up 517%/134%/78% year-on-year, respectively.
Growth in Multi-Destination Student Placements is expected to be buoyed by continued investment. IEL opened 29 new Student Placement offices in FY22, and is expected to open 23 offices in FY23 targeting the under-penetrated, high-growth African and SE Asian markets. Further, the acquisition of Intake Education in September 2022 is expected to accelerate the Company’s presence in Africa – specifically Nigeria, a market management have recently called out as a priority market.
The key leading indicator for Student Placement volumes is data on study visas. Notably, visa data for the September 2022 quarter was very strong, with the most pleasing aspect being that both Canada and the UK recorded numbers well above (>30%) pre-COVID levels, even with Australia recording a strong acceleration. Aside from the strength in student visa figures, the launch of FastLane in December 2021 allows students to receive an in-principle offer from their chosen institution, in many cases, 6x faster than standard applications
Solid Balance Sheet Position
The balance sheet as at 30 June 2022 was in a resilient position with ~A$40m of net cash, despite an additional $100m of debt drawn to facilitate the acquisition of BC India. The acquisition of Intake Education subsequent to 30 June is expected to temporarily reduce net cash levels in FY23, as the acquisition for $83m was funded 50/50 with existing cash and debt facilities.
However, the net cash position is likely to improve significantly from FY24 due to the typically strong levels of free cashflow. In turn, this positions the Company to pursue further bolt-on acquisitions, which are likely to be well received by the market in light of the strategic and financial rationale behind the recent BC India and Intake Education acquisitions.
While IEL shares have re-rated since our recent report, it is worth noting that the current 1-year forward P/E multiple of ~45x remains below the range over the last two years and below the 3-year average multiple of ~65x. Further, the current multiple is not demanding on the context of consensus EPS growth forecasts of +39% over FY22-25 on a CAGR basis. Notably, there is upside risk to these EPS growth forecasts given the potential for additional EPS-accretive acquisitions in light of current balance sheet capacity.
The share price has now rallied back up to the top of its recent range. In terms of a buying opportunity, we either need to wait for it to break above $31, or wait to see if the shares fall back to the lower part of the range again.
Michael Gable is managing director of Fairmont Equities.
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