Australia | Aug 06 2008
By Greg Peel
The nature of the education “industry” is that it always runs countercyclical to the real economy. In good times, the young and the not so young are desperate to get into the workforce and enjoy the spoils. Quieter times, however, promote education as a means of consolidating for good times ahead. Hence the success of a company involved in education can be minimal in a boom but come to the fore during economic weakness. Except perhaps if you’re in child care.
To borrow from its own website, Navitas ((NVT)) offers English language training, high school, university preparation, university programs, career advancement programs and migrant settlement services to students, professionals and migrants from all over the world in campuses located in Australia, Canada, Africa and the United Kingdom. Navitas was founded in 1994 as IBT Education, and listed in 2004 before changing its name last year.
The company has been no stock exchange success story to date, listing at $2.50 and spending most of the time since banging around the two dollar mark. But during that time, Navitas has been spending and growing. As its FY08 result released yesterday showed, that growth is now starting to pay off.
Only three brokers in the FNArena database cover Navitas, and they all rate the company a Buy. While a 100% positive rating from brokers is always a great Sell signal, in this case there are not enough to make the quorum required for that theory to work. For despite the Buys, each of the three brokers were caught out yesterday by what proved to be a very positive result.
Navitas’ 15% year-on-year increase in profit to $42.2m exceeded UBS at $40.6m, Merrill Lynch at $40.7m and Macquarie by 3%. While margins were a bit tight in the English Language, Workforce & Training and Student Recruitment divisions, the University Program division was the star.
In Australia, the company’s Sydney Institute of Business & Technology now has close to 3,500 students and generated $25m in earnings. The success of SIBT suggests upside potential for the newer Curtin Sydney (1050 students) and Macquarie City College (220), notes Macquarie (Equities). Navitas has already negotiated lease space in the CBD for more student capacity, and as the bulk of students hail from China, India and Southeast Asia, one presumes numbers will only grow solidly.
Fraser College in Vancouver has posted its maiden profit in FY08 on only 575 students, and 2-3 more colleges are expected to open in Canada in the next two years. The UK has proven a tough nut to crack, but low base student numbers have begun to increase, supporting profitability. Macquarie expects student intake in the October enrolment to show double-digit growth in Sydney and Canada, and Singapore will benefit next year.
“The FY08 result reflects a key inflection point for Navitas,” suggests UBS, “with its significant investment in new growth initiatives over the past two years translating into earnings growth”. Merrill Lynch acknowledges such, expecting double-digit earnings growth over the next 3-5 years, as well as further campus initiatives to be pursued in FY09.
But it is the countercyclical nature of Navitas’ fortunes that really attract the three brokers. The company should be able to deliver on earnings growth expectations despite a downturn in the Australian and other economies, higher unemployment and a lower Aussie dollar. All brokers adjusted up their earnings forecasts this morning and reiterated their Buy ratings.
For once, its comforting to see analysts put a Buy rating on something for reasons other than the share price has fallen so far it must be a Buy.
The broker’s average 12-month target has increased today from $2.33 to $2.48, while the shares are attracting a bit of interest today in a solid market, pushing up towards $2.30.