Australia | Aug 04 2016
Education services provider Navitas received a lukewarm reception from brokers after its FY16 results as its growth outlook appears subdued.
-Navitas share price premium difficult to reconcile
-Downside risk remains and outperformance unlikely
-Continued weakness in UK and Asian enrolments expected
By Eva Brocklehurst
Education services provider Navitas ((NVT)) received a lukewarm reception from brokers after its FY16 results. The company expects earnings will remain broadly in line in FY17, featuring organic revenue growth across all businesses offset by the impact of closing University Program (UP) colleges.
Results were slightly ahead of Macquarie’s estimates, with UP earnings down 2%, largely on the cessation of the Macquarie University contract. Overall, global enrolments fell 8%, affected by the significant, and in the broker’s view ongoing, regulatory headwinds in the UK.
Navitas has renewed all five of its maturing UP agreements in FY16 and the broker believes this should go some way towards allaying fears about the company’s ability to retain contracts. The flat growth outlook reflects the high level of downside risk associated with contract losses and, while recognising underlying growth from ongoing operations, Macquarie finds it difficult to envisage support for the stock at an above-average price/earnings ratio of 23x.
Moelis cannot reconcile how Navitas can trade at a material premium to the market yet deliver below-market growth, with no growth in FY17 on the broker’s estimates. Admittedly, the shock of the Macquarie University contract loss will be most evident in the first half.
The broker incorporates the renewal of three large contracts maturing in the next 3-9 months in its estimates but notes the risk remains if university partners bring pathway programs in house. The broker, not one of the eight monitored daily on the FNArena database, maintains a Sell rating and $5.09 target.
The stock is trading slightly above its historical average premium to the market and UBS remains below guidance in its estimates, expecting continued weakness in student enrolments in the UK and Asia.
The broker acknowledges the stock has attractive attributes such as a high return on capital, low gearing and strong cash flow conversion. Nevertheless, the downside risk to FY17 and lack of earnings growth suggests further outperformance is unlikely.
The results were in line with Deutsche Bank’s forecasts. University Program enrolments were down in the second semester, primarily affected by the end of the Macquarie contract.
The SAE division performance is of some concern to the broker, with a second half decline affected by slower volume growth in the US and Europe amid reforms by the Australian government to vocational education funding. Still, this is a relatively small division, the broker notes, and the company has guided to some growth in FY17.
Deutsche Bank understands the company is still considering its options in relation to the UK VAT case, where SAE UK has been deemed to be not exempt. Leave to appeal has been granted and a hearing is expected in the next 10 months. The company previously disclosed the maximum liability to June 30, 2015 as $5.2m.
Morgan Stanley found few surprises in the results and believes the company is on the road to a better performance, reminding the market that FY17 is the final year of negative earnings impact from the loss of the Macquarie University contract and growth should return to earnings in FY18.
FNArena’s database shows four Hold ratings and one Sell (Macquarie). The consensus target is $5.35, suggesting 6.7% in downside to the last share price.
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