Treasure Chest | Oct 11 2021
This story features IDP EDUCATION LIMITED. For more info SHARE ANALYSIS: IEL
FNArena's Treasure Chest reports on money making ideas from stockbrokers and other experts. Is there scope for IDP Education to become the dominant provider of English language testing globally?
-Substantial value could be obtained from buying remaining IELTS business
-Material opportunity already embedded in the current share price
-pent-up demand ahead of border re-opening appears robust
By Eva Brocklehurst
Having recently put India front and centre of market attention, is international expansion a hidden opportunity for IDP Education ((IEL))? Morgan Stanley asserts accretion to earnings from an optimised global footprint for IELTS (International English Language Testing System) could be in the realm of 39-70%.
This would accrue not only from expanding to new geographies but also if IDP Education were to buy the remaining IELTs business. Morgan Stanley believes a global deal could be priced on a weighted average basis and there is monetisation upside from moving to one distributor.
Better deal structures and substantial cost synergies would follow. The broker stresses this is an assessment of the potential from consolidation and does not imply any specific transactions.
IELTS is jointly owned by Cambridge Assessment which produces the test, along with British Council and IDP Education which administer the test. Hence, British Council and IDP Education compete, such as in China, and Morgan Stanley asserts this less than ideal. Hence, a more unified structure could unlock value and the Indian transaction may be the start.
IDP Education already has exclusive use of the IELTS test in Australia and India, with the latter now offering 52% of pro forma group revenue in FY22, UBS points out. Morgans is also attracted to the stock for the proven compounding ability of the IELTS business and potential for further consolidation of the distribution network.
Significant Market Potential
The market size is calculated at around $700m in terms of existing IELTS revenue that can be optimised. Incremental gross margins for IDP Education in IELTS in FY19, ahead of the pandemic, were 48.1%.
Morgan Stanley believes margins of more than 50% are inevitable with computer-based and remote learning. This implies a material gross profit opportunity exists of around $350m for the company, which compares with the $485m forecast in FY22. Macquarie notes IDP Live is launching this month to new clients and will also attract significant efficiencies.
Morgan Stanley contends there is scope for acquisition of the entire BC IELTS operation and calculates $6.3m in upside to earnings (EBIT) for every 1% of pricing upside, ex China, where IDP Education and British Council compete.
IELTS has brand recognition and credibility well ahead of any student placement agency. Therefore, putting the “IDP” brand alongside would be an advantage, in the broker's view. If this results in just 1% incremental conversion of the 1m individual students currently taking a test each year with BC IELTS, it would imply 5-6,000 placements. Revenue synergies from student placement could amount to $22-112m.
Morgan Stanley accepts there is a premium embedded in the share price for IELTS options yet, if a scenario ensues where IDP Education acquires the whole BC operation for an upfront cost, a $55 share price could be realistic under conducive conditions.
Admittedly, there is a large degree of uncertainty related to this bullish call, in terms of timing, as the deal in India took years to eventuate. There is also the unknown valuation metrics, as the broker acknowledges its analysis is based on extrapolating historical trends and little actual data.
Yet, underpinning the bullish outlook, UBS notes, in tracking Google trends, the situation in India vis a vis the pandemic is improving rapidly and IELTS search trends are up strongly since the end of FY21. Worldwide search activity on “IELTS” has recovered to just -6% below pre-pandemic levels and is now up around 11% since June.
In analysing the key sources for IDP Education, the broker points out 55% of regions are positive and just Nigeria, Philippines, Indonesia and UAE, specifically, are down compared with June. Moreover, the sell-down of Education Australia shares in the stock has removed what UBS believed was a potential overhang.
In the short term, brokers agree the catalyst is the re-opening of Australia in February for the intake of international students. This could make a difference to gross profit of $65m, Morgan Stanley asserts.
The broker bases its bull case forecasts on such a likelihood. Moreover, as universities are reliant on overseas students to achieve budgets, agent commissions are likely to spike and this could be evident as soon as the February results.
IDP Education is well placed for a rebound in placements and recovery in IELTS, Macquarie agrees, also noting student placement leads are exceeding pre-pandemic levels in the northern hemisphere and the long-term drivers of the business are intact.
Yet the broker is concerned that, with over 20% of the Australian cost base re-allocated to higher areas of demand, this could pose resourcing issues when local demand returns as borders re-open. A re-direction of demand to the UK from Australia could prompt a reduction in inflow of students to Australia in the medium term, because of the latter's greater clarity on border policy.
Based on IDP Education's own research, Morgans note students are showing a greater propensity to start study online and then transition to onsite learning. This should support Australian placements when certainty is provided regarding the ability to re-enter the country.
FNArena's database has four Buy ratings with a consensus target of $34.96 that suggests 3.2% upside to the last share price.
See also, IDP Education Now Top IELTS Provider In India on July 5, 2021.
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