Innovation And Structural Growth Driving IDP Education

This story features IDP EDUCATION LIMITED. For more info SHARE ANALYSIS: IEL

New research coverage highlights several growth drivers for IDP Education.

-Record student placements and IELTS volume for IDP Education
-Numerous structural tailwinds and innovation are key drivers
-Management response to rising competition for IELTS
-Interim results marginally missed the consensus forecast

By Mark Woodruff

In the wake of covid, international education services provider IDP Education ((IEL)) has experienced record levels of student placement and volumes for international English language testing services (IELTS).

The company primarily places prospective students from India and China in education institutions across Australia, Canada and the UK.

Many universities significantly reduced international recruitment staff during the pandemic and now have a greater reliance on student agents and digital platforms such as IDP Connect to source students.

Activity has been boosted by the structural growth tailwinds of supportive government policies and the rising middle class in emerging economies, along with improving global mobility due to the reopening of international borders, according to Bell Potter.

An increasing demand for an international education in English speaking countries also continues to be a key structural driver of growth, explains the broker, which began research coverage last week with a Hold rating and $30.35 target price.

Innovation, aided by the company’s size and scale, is a key point that differentiates IDP’s offerings in highly competitive markets and helps defend market share, according to the analysts. 

Credit Suisse agrees on the company’s scale advantage and points out the company’s brand, scale and vertical integration with IELTS, along with its digital footprint, assist in yielding a lower cost of student acquisition relative to smaller student placement agencies.

This broker, which initiated research in March this year with an Outperform rating and $35.50 target, suggested a reduction in the sales and marketing capabilities of universities and rising immigration quotas by Canada are cyclical factors supplementing underlying demand over the medium term.

Local student tuition freezes and declining birth rates in major English markets have caused universities to pivot to international students to increase classroom utilisation, meet diversity targets and improve profitability, explained the analysts. International student tuition is often at multiples of their domestic peers, with tuition price rises determined by market forces.

Organic growth is also driven via the strategic expansion of office and testing centre networks, notes Bell Potter, along with the maintenance of strong relationships with organisations and governments.

The company is a one-third co-owner of IELTS, the world’s largest high stakes English proficiency test, which Lighten-rated Ord Minnett sees as the strongest segment of the company. IDP is also the largest student placement agent in Australia with around 23% market share. 

The reputations, in students’ eyes, of IDP’s key destination countries as top study and working destinations were rebuilt during the pandemic, observes Bell Potter. This was prompted by workforce shortages and weaker economic growth, which encouraged more supportive government policies.

Competition

IDP Education co-owns IELTS alongside the British Council and Cambridge Assessment. The exam is designed to assess the English language skills for non-English speaking students who wish to relocate to an English-speaking country.

Competitors of IELTS include the Pearson Test of English Academic (PTE), Test of English as a Foreign Language (TOEFL), Cambridge English (CAE) and Duolingo.

Credit Suisse believes IELTS' popularity is entrenched via network effects which gives IDP significant pricing power and higher margins than distributors of competing tests.

However, government acceptance for PTE mirrors IELTS across the major student placement markets of IDP, explains the broker, and wider acceptance of PTE in Canadian migration lowers the switching costs of consumers from IELTS to PTE.

At the end of April, Outperform-rated Macquarie noted IDP was losing market share to PTE, particularly in India, and reduced its forecasts for IELTS volumes and its target price to $34 from $36.

This broker highlighted Pearson had been gaining share since June 2021 and understood the drivers were due to increased marketing by Pearson and perception of an easier test.

But as Credit Suisse points out, IELTS has introduced innovation in the form of One Skill Retake, which allows students to retake failed test components. It’s hoped this will result in increased market share.

Most recent reporting

More growth appears to be on the horizon, suggested Ord Minnett back in February when reviewing first half results, as placement volumes from India and China remained below pre-pandemic levels.

The results were marginally lower than consensus expectations, noted Morgan Stanley, with IELTS volume weakness partially offset by price, which increased by 4% in constant currency terms.

Earnings margins expanded to 24.6% supported by operating leverage and digital investment, and the broker expected the reopening of China would support second half student placement volumes.

At the time, management expected IELTS volume growth of around 10% over the next three to five years from 5.5% in the first half.

The average target price of six brokers in the FNArena database is $31.48, which suggests around 17% upside to the latest share price. There are three Buy (or equivalent) ratings, two Hold and the one Lighten recommendation from Ord Minnett.

Outside of daily coverage, Jarden and Goldman Sachs have Buy (or equivalent) ratings with a target price of $33.45 and $35.70, respectively.

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