Australia | Mar 08 2017
Brokers have differing views over the extent of education provider Navitas' latest setback.
-Higher concentration of risk than previously envisaged
-Potential for less favourable terms on upcoming contract renewals
-Tightened student visa restrictions limiting the outlook
By Eva Brocklehurst
Just as hopes emerge education provider Navitas ((NVT)) is gaining some clear air and has moved past the loss of the Macquarie University contract, another setback is delivered. The setback, albeit more minor than the university contract loss, centres on a much reduced contract to deliver the Adult English Migrant Program (AMEP) for the Commonwealth Department of Education & Training (DET) .
This will not be renewed in most regions upon expiry on June 30, resulting in a permanent reduction in operating earnings (EBITDA) of $12-14m from FY18. The company has been named preferred tenderer in some small regions where it does not currently have a presence.
Navitas has never previously disclosed earnings from AMEP. Credit Suisse was surprised that AMEP is responsible for the majority of the professional and English language program (PEP) earnings, which provides a higher concentration of contract risk than previously estimated. The loss of the Macquarie University contract created a $30m hole in earnings and resulted in little growth over the last two years, despite positive macro trends.
A return to growth in FY18 now appears unlikely and Credit Suisse downgrades to Underperform, highlighting the downside risks facing a company that is predominantly a contractor to public sector entities. The broker's rating had been moved to Neutral after the full year results, to reflect potential for a re-rating in the expectation of a return to growth in FY18.
Credit Suisse now estimates that FY18 earnings will be below FY15. This is the second major contract loss in under three years and the two are now estimated to have cost at least $40m in recurring earnings, or more than one quarter of the current earnings base. The broker expects the market to ascribe little value to Professional English Programs (PEP) going forward, with the division now comprising the remnants of the AMEP contract and a collection of vocational training assets. The company will provide an update on the AMEP contract at the investor briefing in April.
Competitor Also Lost Share
For Macquarie, the loss of AMEP is not a quality issue. While worse than anticipated, and with a forecast 60% decline in FY18 PEP earnings, the broker notes the loss reflects the government's intention to diversify providers rather than a lack of quality from Navitas.
Anecdotal evidence suggests a major competitor also lost share. The broker considers the stock price at a level which implies no earnings growth from PEP or the acquired SAE Group (which offers programs in film, television, audio, animation and gaming through 50 colleges in 27 countries), leaving strong valuation support and upside potential.
UBS estimates the company can grow its core earnings at around 9% compound over FY18-21. Combined with other attractive attributes such as a high return on capital, strong cash flow conversion and a low geared balance sheet the broker finds the stock attractive at current levels.
Moelis suggests there are now clouds around upcoming contract renewals with six due in 2017, representing around 30% of the University program division student numbers. Deakin, Curtin and Manitoba (Canada) all mature in December and make up the bulk of student renewals. The broker assumes that all contracts are re-signed but highlights the risk of less favourable terms.
Moelis believes Navitas should trade closer to a market multiple given limited earnings growth between FY15-18, regulatory risk around international student visa regimes and the potential risk for contract renewals. Tight student visa restrictions in the US in the UK are likely to remain in the next 12 months, while funding changes in Australia limit PEP segment growth.
Australia retains the greatest potential in university programs, given limited partner capacity in Canada. Australasia forms the bulk of these sales, with North America now 20%. Moelis, not one of the eight stockbrokers monitored daily on the FNArena database, finds the stock expensive and has a Hold rating and $4.32 target.
FNArena's database has two Buy ratings, two Hold and one Sell (Credit Suisse). The consensus target is $4.73, suggesting 16.5% upside to the last share price. This compares with $5.03 ahead of the news. The dividend yield on FY17 and FY18 forecast is 4.9% and 4.8% respectively.
See also, Brokers Upgrade As Navitas Finds Clear Air on February 2, 2017.
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