Treasure Chest | Jan 15 2014
By Greg Peel
Navitas ((NVT)) ostensibly provides tertiary educational services to foreign students, including university certificate, diploma, bachelor and masters degrees, as well as pathway programs which include pre-tertiary programs for international students who do not otherwise qualify for placement on academic record or English language capabilities. Navitas manages campuses across the globe.
The bottom line is that Navitas offers English-speaking,“Western” university education to students from emerging markets whose parents (one mostly assumes) are happy to stump for the cost. For centuries, the sons and daughters of wealthy aristocrats or merchants have been sending their children off to the likes of Oxbridge, then the Ivy League, and in more recent times Sydney University, for example, to obtain tertiary degrees which are globally recognised. The cost of education at colleges of high esteem has mostly been within the bounds of only the wealthy, but the now burgeoning middle class in the likes of China and India, for example, offers a vast and growing pool to which Australia is in a solid position to “export” education.
Over the last two years, Navitas’ share price has doubled, with investors finding the stock attractive for its combination of growth opportunity despite an arguable level of defensiveness and a not negligible yield. But towards the end of last year stock analysts decided that Navitas had become rather too well priced-for-success. One broker – Macquarie – saw a stock that was not only trading at a substantial price/earnings premium over the market, it was trading at a significant premium to its own historical average. While the company may offer solid earnings growth and some yield to boot, that value was already well accounted for, the Macquarie analyst insisted. Hence the broker rated the stock Underperform.
That analyst has since been replaced.
As is often the case when a fresh set of eyes scans over the numbers, the new Macquarie analyst decided the previous analyst had it all wrong. Hence the new analyst upgraded the house recommendation on Navitas straight to Outperform from Underperform, and lifted the broker’s target price to $7.00 from $4.35 – a 61% revaluation.
To put things into context, NVT is trading, as I write, at $6.33. Prior to Macquarie’s change of heart, the $4.35 target was far and away the low marker in the range of FNArena database broker targets, with the next lowest $5.10 (UBS, Sell) and the highest $6.80 (Credit Suisse and Deutsche Bank, both Buy). So while $7.00 is a big jump on $4.35 it’s not out of context with consensus, which now stands at $6.24.
It is also worth noting five of the seven FNArena brokers covering the stock have not updated their views since October, including all three of the above mentioned. Outside of Macquarie, CIMB has provided a lone update based on NVT’s third semester enrolments which were quite strong, albeit CIMB retains a Neutral rating on the belief earnings growth is priced in.
The new Macquarie analyst, by contrast, sees upside to both earnings and share price.
Over the next decade the global mobile student population is forecast to grow to more than 7 million from 4.3 million in 2011, the analyst notes, driven by population growth, particularly in Asia, the growing desire for tertiary education within that population, and ongoing globalisation, with English the global language. The strongest growth is expected from China, India, Saudi Arabia and Nepal. Navitas boasts “significant” excess capacity to accept these newcomers.
Australia represents around 70% of Navitas’ current revenue, and clearly the global market for student enrolments is competitive and will become more so. But Australia’s strong relationships with Asia, quality education and attractive post-study work arrangements, provided with the support of government policy, is why industry research estimates some 22% growth in international student numbers. Locally, Navitas enjoys a 65% market share and has established long-term contracts with university partners.
There is a risk government policy will change, but that would fly in the face of attempts to reignite Australia’s non-mining economy. Competition, particularly from online offerings, will no doubt be strong. But Macquarie is now forecasting 16% earnings growth for Navitas in FY14, 23% in FY15 and 24% in FY16. These numbers are in line with consensus, and consensus forecasts a 3.1% yield, rising to 3.7% in FY15.
Navitas has an established market position in Australia, Macquarie notes, and is close to reaching breakeven on its pathways investment in the US. Ongoing offshore expansion provides further opportunity and Navitas has a strong balance sheet in place.
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