Australia | Feb 03 2016
-Buy-back signals confidence
-Absence of Mac U contract in H2
-Flat earnings outlook in FY16
By Eva Brocklehurst
Despite the looming loss of the Macquarie University contract, Navitas ((NVT)) provided a modestly upbeat first half result, sweetened by the announcement of a buy-back of shares. The buy-back is a positive surprise for brokers. Generally because a return of capital to shareholders is preferred to a potentially dilutive acquisition.
Navitas will buy back up to 7.5% of share on issue, which Morgan Stanley estimates to be 1-2% earnings accretive. The broker believes this announcement indicates a degree of confidence in the earnings outlook.
The company has stated that full year earnings should be broadly in line with FY15. Brokers expected this would be the case as while underlying growth is firm, the second half will be weaker because the Macquarie University contract concluded in the first half.
University program earnings grew just 1.0% in the first half, Credit Suisse observes, on lower margins, as the largest and highest-margin college began to wind down ahead of its transfer to Macquarie University. The broker estimates a negative $20-25m annualised earrings impact and does not expect the university programs will return to growth until FY18.
The buy-back appears to reduce the risk of acquisitions, following recent commentary that Navitas could be interested in acquiring vocational training assets, although Credit Suisse notes management was non committal regarding the scale and timing of the buy-back. The stock appears fully priced to Credit Suisse and a Neutral rating is maintained.
The company experienced solid earnings growth across its Australian operations and North America is performing well. UK revenue grew despite a tough regulatory environment. Despite this, Credit Suisse suspects margins could come under pressure.
The SAE division delivered the best results, in Credit Suisse's view, almost doubling revenue growth in the half. The company expects this earnings growth will likely moderate in the second half. The broker also notes this is the more capital-intensive, lower-quality business than the university programs and attracts a lower multiple.
Cash conversion was strong at 74%, Macquarie maintains, although lower than the prior period (88%) because of negative working capital movements. The broker expects this should recover in FY17.
The performance of SAE was the highlight for Deutsche Bank and the broker believes the earnings margin, increasing to 14.3% from 8.5% in the prior corresponding half, should provide comfort that the company has successfully cycled the one-off costs incurred.
The broker remains cautious about the impact of the loss of the Macquarie Uni contract, suspecting there is some risk to guidance if the other programs are unable to achieve sufficient growth from lower margin contracts.
Navitas recently renewed its contract with the University of South Australia for a further 10 years under similar terms and conditions. A joint venture model was considered but not pursued.
This illustrates to Deutsche Bank the likelihood that universities are uncomfortable about committing to a JV model, given the required investment. Hence, whilst such a model would deliver greater earnings certainty for Navitas, it is unclear whether it will be widely adopted.
Management also signalled that enrolment growth rates in the UK are being affected by low visa refusal requirements with any immediate positive change to education policy considered unlikely, in Deutsche Bank’s view.
There are five Hold ratings for Navitas on FNArena's database. The consensus target is $4.53, which signals 3.3% downside to the last share price.
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