Australia | Feb 04 2015
-Long-term growth focus in US
-Constrained by weak momentum
-FY earnings likely at low end of range
By Eva Brocklehurst
Broker fears regarding a potential earnings hole for education program provider Navitas ((NVT)) have been heightened in the wake of the company's first half report. The results were softer than many expected, impacted by one-off costs from the company's SAE colleges. Management may have reiterated FY15 earnings guidance but six months ago the company signalled the loss of its major contract for the Macquarie University campus as from 2016. Concerns about where the company can find the necessary growth are mounting, as there have been no new partner announcements.
Morgans suspects the tightening of enrolments in Australia and the UK, to counter non-genuine students, will be a headwind in the second half. The balance sheet may be conducive to an acquisition but the broker is not sure just how this would be perceived by the market. Morgans likes the company's structural story but does not find the valuation attractive and downgrades to Reduce from Hold. The broker notes another record half year for professional and English programs but migrant arrivals are slowing and management has guided to a flat second half in this segment.
Navitas opened its sixth US college last month and recorded a strong first intake. The university programs remains the company's most significant division but the growth story of FY13-15 is now ebbing as the loss of the Macquarie University contract comes into focus amid a dearth of new partner agreements. UBS believes investors should focus on the US for longer term growth catalysts. The broker incorporates another 10 university partners in the US in its estimates, at the rate of two per year for five years. That said, UBS retains a Neutral rating on the stock, unable to justify an above-market multiple without any immediate announcements as catalysts.
There is a need for caution, in Deutsche Bank's view. Navitas conceded its non-recurring costs were unexpected and primarily related to the overhaul of the SAE management team in the US, but this leaves limited room for error in the second half if guidance is to be met. The broker remains of the view that these unexpected costs are indicative of the potential earnings risks and retains forecasts at the low end of management's guidance for FY15 earnings between $162-172m. Guidance, at the mid point, implies growth of 15% in FY15.
Citi expects the stock will be constrained in the short term by a lack of earnings momentum. Softer enrolments are expected in university programs and guidance rests on a large turnaround from the SAE colleges. The broker notes management has backed down from suggesting that organic growth should largely offset the loss of the Macquarie contract in FY16. The broker senses that the contribution from Macquarie continues to be underestimated by the market. Still, Citi is upbeat about Australian enrolment growth, suspecting the crackdown on student applications from India and Nepal will have a more modest impact beyond the second half of FY15.
Morgan Stanley is also of the view that the stock will be stuck in a trading range until there is more evidence that the loss of the Macquarie University contract was a one-off. The broker observes the shares have de-rated since that announcement but does not consider them cheap. Moreover, the risk profile is considered materially higher and the growth trajectory for the next three years lower than historical levels.
While pleased to have guidance confirmed, Credit Suisse regards management's comments regarding slowing of growth rates for university, professional and English programs in the second half mean full year earnings are likely to be at the lower end of the range, while a substantial turnaround at SAE is required.
The broker also factors in the fact that Navitas may lose even more students now that Macquarie University has confirmed it will end its relationship with the Macquarie City campus, which will likely close. Navitas will lose around 2,000 students when Macquarie University takes over operations at the North Ryde campus next year. Credit Suisse likes the long-term macro environment but considers there are too many headwinds to be positive on the stock at current levels.
FNArena's database contains one Buy (Citi) rating, five Hold and one Sell (Morgans) for Navitas. The consensus target is $4.98, signalling 9.2% upside to the last share price, and compares with $5.35 ahead of the results. Targets range from $4.15 to $5.70. The dividend yield on FY15 and FY16 forecasts is 4.6% and 4.9% respectively.
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