Australia | Jul 28 2015
-Macquarie Uni loss keenly felt
-Margins improve first time since FY11
-Will regulatory risks spread?
By Eva Brocklehurst
Navitas ((NVT)), the education program provider, has navigated FY15 despite the hazards. Earnings are estimated to be flat over the next two years as the impact of the loss of the Macquarie University contract washes through.
The result was in line with Morgan Stanley's expectations and there were few surprises. Nonetheless, the broker envisages some downside risk to consensus forecasts, given management suggested FY16 would be broadly in line with FY15.
Materially, the impact of the loss of the Macquarie University programs will take effect from February 2016 but the broker expects this to be mitigated by earnings growth from other contracts and divisions.
Credit Suisse had expected the company might miss guidance, given the headwinds. Instead, on a more positive note, margins in university programs improved for the first time since FY11. The company now suggests university earnings will decline, as growth is expected in other divisions with flat outcome, overall, in FY16.
The broker remains bullish on the long-term outlook for international student growth and, given the fall in the share price, upgrades to Neutral from Underperform. The outlook appears largely priced in and Credit Suisse envisages near-term risks are to the upside.
UBS maintains investors should focus on the long-term growth rate for the university programs and believes there is more risk for upgrades to estimates if new programs can be signed up. To that end UBS incorporates another 10 university partners in forecasts, to be gathered over the next five years.
Even accounting for signing up new partners, the broker estimates earnings to grow at a rate of 6.2% over FY17-25, which compares with the 10% achieved in FY12-15.
University programs are a critical division, representing more than 75% of group earnings, which explains why the outlook is subdued. A wave of strong growth ended in FY15 because of the loss of the Macquarie University contract as well as increased regulatory hurdles.
Stricter criteria were applied to migrant student programs in the second half by the Department of Immigration. This also follows a decline in UK enrolments because of regulatory changes.
Deutsche Bank expects that besides the loss of the Macquarie University contract and other challenges stemming from the tighter UK regulatory environment, the university division will not be able to make up lost earnings over FY16-17. The broker still believes the stock is fairly valued, with growth likely to return in FY18. Goldman Sachs is of a similar view, envisaging reasonable valuation upside but also more opportunity in other small to medium industrial stocks.
Moelis takes a more negative stance. The broker, not included in the FNArena database, is underwhelmed by the results and has a Sell rating and $4.04 target, suspecting the company still has a lot of pain to endure for the next 18 months. Moreover, Moelis believes there is no guarantee that the stricter regulatory changes that occurred in the UK and Australia will not happen in North America in the future.
University partners may also use Macquarie University's exit to negotiate better terms, such as shorter duration contracts, or even trial their own pathway programs in house. While the company's new joint venture model is sound, with less risk up front, Moelis also believes it means less reward, as Navitas receives only 51% of the earnings.
The near-term issues of replacing contracts are expected to hobble the company and keep growth in check, in Macquarie (the broker)'s view. Cash conversion remains strong and underlying margin growth is in evidence based on improved efficiencies and take up of professional courses outside of the migrant English courses. Hence, the broker considers the risk/reward relatively balanced.
FNArena's database has one Buy rating and one Sell, both from brokers that are yet to update on the latest news. There are five Hold ratings for the remainder. The consensus target is $4.70, suggesting 10.8% upside to the last share price. The dividend yield on FY16 and FY17 forecasts is 4.7% and 4.6% respectively.
Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.
