IDP Education: Taking a study break
About the author:
- Author name:
- By Scott Murdoch
- Job title:
- Senior Analyst
- Date posted:
- 20 October 2021, 9:00 AM
- Sectors Covered:
- Diversified Financials, Professional Services
- IDP’s 1Q22 update confirmed mostly strong recovery/growth trends: IELTs volumes +84% on the pcp (~55% organic); Northern Hemisphere placements +120%; and Australia placements -24% on the pcp.
- The strength of UK/Canada placements is a key highlight, supporting the expectation this division can drive a material uplift in long-term earnings.
- We remain 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). However, valuation is now a hurdle and we move to a Hold. We see consolidation/acquisition of part or all (in time) of the IELTS distribution as the key upside risk.
1Q22 AGM update: off to a strong start
IELTS: 1Q22 IELTs volumes are up 84% on the pcp, a combination of: 1) a weak pcp; 2) the addition on BC India volumes; and 3) organic growth/recovery. The pcp (1Q21) was heavily impacted by Covid restrictions (testing ended 1Q21 with capacity at 70%, having recovered from ~55% in Aug-20).
We estimate 1H21 volumes were roughly split 40/60%. The BC India acquisition contributed for 2.5 months. Of the 84% growth, we estimate ~40% is from the acquisition and 54% from organic growth.
Student Placement: Finalised 1Q22 placement volumes are +120% for the Northern Hemisphere and down 24% for Australia. In the pcp, IEL stated applied volumes were down 22% for 1Q21 (1H21 volumes ended up down ~37%). Whilst IEL is cycling a relatively weak pcp, the growth in UK/Canada placements is very strong.
IEL’s 1Q22 update puts the group on track to deliver 1H placement volumes around pre-Covid levels, although composition reversed (with ROW +35% on pre-Covid and Australia -47%). IEL stated that Australia remains relatively weak with students waiting for clearer signs of borders reopening.
We see the resumption of strong Australian student placements from 2H22 (with FY23 having the benefit of an expected strong recovery in Australian placements).
Other divisions: English language experienced a 22% reduction in courses delivered (lockdown related); IDP Connect has experienced 8% growth in revenue versus pcp; and data insight/consultancy services grew 110% on the pcp.
Mapping out our assumptions
IELTs: We expect ~67% volume growth in FY22, split ~34% organic growth and ~33% from the BC India acquisition. With the increased volume skew to India, we forecast the average IELTs fee to compress ~4%. We forecast 52% GP growth to A$217.5m, with 210bps margin compression (impact of acquisition).
SP: We factor in volumes +64% to 62.5k, comprising ROW 44.1k (+87%) and Australia 18.4k (+27%). We forecast gross profit growth of 70% to A$190m, with slight gross margin expansion to 79% (from 78.3% FY21).
Forecast and valuation changes
We make upgrades of 3.3%-4.5% across the forecast period (FY22-24). Our DCF valuation increases to (login to view target price).
We move to a Hold on valuation. Whilst we take a neutral view based on valuation, we believe IEL will report strong near-term results and news flow around student access/travel into Australia should generally continue to improve.
We believe further consolidation of the IELTS distribution network is probable, either steadily; taking over a large number of jurisdictions in one transaction; or in its entirety. Timing is uncertain, however this provides significant earnings and long-term value upside.
We are looking for any weakness to provide a better short-term entry point ahead of this potential catalyst.
Confirmation of Australian border re-opening; strength in multi-destination student placement numbers; further IELTS territory acquisitions.
Ongoing Covid restrictions inhibiting IELTS testing and disrupting SP markets; IELTS agreement changes; regulatory changes; loss of major Uni clients.
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