Australia | Oct 28 2009
By Chris Shaw
For some time the market has been broadly positive on the outlook for education provider Navitas ((NVT)) but the scales have today tipped even further in favour of the positives with Citi initiating coverage with a Buy, High Risk rating, reflecting the view the high growth international student market should offer a solid earnings outlook in coming years.
In Australia, Navitas is the leading provider of university pathway programs, as well as being the largest provider of English language courses to international students. With continued growth expected in international student enrolments into Australia given its geographical proximity to Asia and an extensive agent network in the region as well as a quickening expansion program, Citi expects earnings growth to be strong in coming years.
Also, there is scope for Navitas to replicate its university pathway business model in overseas markets that are currently under-penetrated, especially given its first mover advantage in both the Australian and international markets. While competition is expected to intensify, Citi suggests it is this first mover advantage that will allow Navitas to counter such competition.
A strong financial position will also help facilitate the expected earnings growth as the balance sheet is currently in a net cash position to the tune of 12c per share, while Citi’s forecasts indicate strong operating cash flows from operations.
Citi sees this as enhancing prospects over the longer-term and its earnings per share (EPS) estimates reflect this, the broker forecasting outcomes of 18.3c in FY10 and 22.5c in FY11. The FNArena database shows consensus EPS forecasts of 17.9c and 20.3c in FY10 and FY11 respectively, while UBS is the most aggressive in the database with forecasts of 20c and 22c and Deutsche Bank more conservative at 17c and 19c for the next two years.
As Citi points out, its forecasts imply an earnings multiple of 20 times its FY10 forecast, meaning the stock is not cheap, but taking a longer-term view the broker sees the stock returning to a market multiple by FY13 given the growth expectations built into its numbers. The plus in Citi’s view is demand drivers appear long-lasting and the potential from overseas expansion is sizable given the scope to build stronger market shares.
Not everyone agrees with Citi’s outlook as earlier this week RBS Australia sugggested while short-term earnings momentum for Navitas looks good it may find sustaining such growth more difficult as it would be coming from a higher base, especially given the global economic environment remains relatively weak.
But Macquarie sides with Citi and takes the view the growth multiple being applied to the stock is reasonable given the earnings growth outlook and the fact the earnings stream itself is relatively defensive. Credit Suisse agrees and continues to forecast earnings per share growth of 15-20% over the next four to five years.
Both Macquarie and Credit Suisse rate the stock as Outperform, while the FNArena database overall shows five Buys compared to three Hold ratings. The average price target on the stock is $3.77, up from $3.65 with the addition of Citi’s $4.49 target. This is the highest in the database while Deutsche Bank has the lowest price target at $3.15.
Shares in Navitas today are stronger despite a weaker overall market and as at 12.50pm the stock was up 6c at $3.78, which compares to a range over the past 12 months of $2.01 to $3.88.
