IDP Education: Time to move from recovery back to growth
About the author:
- Author name:
- By Scott Murdoch
- Job title:
- Senior Analyst
- Date posted:
- 26 August 2021, 6:00 AM
- Sectors Covered:
- Diversified Financials, Professional Services
- IDP Education (ASX:IEL) FY21 result was in-line with expectations, down 36% on the pcp, but largely a result to look past given Covid-19 impacts across all divisions.
- IELTS volumes have moved from recovery to growth. Momentum, pent-up demand and the addition of the BC India volume (acquired) leads to a big FY22F uplift.
- UK/Canada student placement is seeing strong demand. Australian SP faces a hopeful recovery from 2H22, supporting a FY23F earnings step-up.
- Add maintained. We are attracted to the market share opportunity in student placement; the proven compounding ability of IELTS; and the potential for further consolidation of the IELTS distribution network (via acquisition).
- We note there could be meaningful short-term share price volatility post the impending Education Australia 15% sell-down.
FY21: 2H21 provides some read on the recovery
IEL reported underlying NPAT of A$45m, down 36% on the pcp and in-line with our expectations (A$46.4m).
IELTs testing volumes (~4% above expectations), were up ~13% hoh, despite a sharp 4Q drop in India (Covid-19 restrictions). Test fees were down 5% on the pcp, however up 3% on a constant currency basis. IELTS revenue grew 6% hoh.
2H21 Multi-destination placements (-12% on pcp) were above expectations. Australian SP average fee improved (+10.5% on pcp) of which ~50% was from sustainable commission rate improvement (the rest from mix, provision release).
IEL closed with A$250m net cash. We expect ~A$74m net cash in FY22-end post the settlement of the BC India business.
Moving from recovery back to growth; Australia SP the laggard
IELTS: IEL’s testing volume charts point to commencing FY22 with ~120-125k tests per month (annualised ~30% above FY21). IEL noted that strong momentum has continued into FY22 to-date, a combination of pent-up demand and the reopening of international study/work. We expect 54% GP growth in FY22 which will be volume driven (including a ~30% increase from BC India).
Given a higher skew to India, we expect a lower average fee for FY22. We also forecast some (~160bp) gross margin compression as the BC India business is integrated through FY22. Medium-term GM tailwinds are evident post the acquisition integration and the significant increase in computer-delivered testing (currently ~30% of volume).
UK and Canada SP strong: leads for multi-destination (primarily UK, Canada) are now above pre-Covid-19 levels. Canada has had supply chain issues (quarantine requirements and lack of flights), however these have eased (no quarantine requirement for the fully vaccinated). Demand for UK placements is strong, with UK Universities retaining the additional January intake and having a stronger focus on Asian source countries (decline in EU students post Brexit).
Australia expected to bounce, when it can: leads remain significantly down however have stabilised and management noted that demand is expected to return sharply once there is clarity on border reopening.
Opex is expected to increase ~25% in FY22, a combination of growth investment and the acquisition.
FY22 downgrade; minor changes to outer years
We downgrade FY22 by 11.5% (see overleaf); minor changes to FY22+.f
Investment view: Add maintained
Add maintained. We believe IEL is building technology-led competitive advantage in the large student placement market. IELTS is an industry leader and the potential for further consolidation of its distribution (by acquisition) adds to the group’s potential.
Confirmation of Australian border re-opening; strength in multi-destination student placement numbers; further IELTS territory acquisitions.
Ongoing Covid-19 restrictions inhibiting IELTS testing and disrupting SP markets; IELTS agreement changes; regulatory changes; loss of major Uni clients.
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