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IDP Education Suffers Flesh Wound In Canada

Australia | May 30 2023

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

Shares in IDP Education were shellacked yesterday after news it had lost its Canadian IELTS monopoly, and brokers assess the damage.

-IDP Education's test volumes in Canada vulnerable to competition
-Brokers remain upbeat on the medium to long-term outlook 
-Assessing the damage

By Sarah Mills

News IDP Educations ((IEL)) lost its Canadian monopoly on providing English tests for student visas yesterday morning triggered a sharp sell down in the company’s share price to roughly $22, down -16%.

What happened?

The Canadian government will accept four new English tests for student visas in its Student Direct Stream visa class, along with IDP Education’s IELTS (International English Language Testing System), starting in August.

IDP Education holds a one-third stake in IELTS, the world’s largest high-stakes English proficiency test, along with the British Council and Cambridge Assessment.

In quick responses to yesterday's news, updates by Morgan Stanley and Goldman Sachs estimate IDP Education will lose roughly -30% of its Canadian Student Direct Stream volumes as a result.

No Big Surprise

Canada is the last of the English speaking Commonwealth governments to remove the IELTS monopoly and there are plenty of precedents from which to extrapolate.

UBS observes the opening of the UK market to competitors resulted in a -10% market share loss, while the opening of Australia’s market triggered a greater loss.

The consensus among brokers appears to be that sellers of the shares may have been a bit too trigger happy.

Yes, the move represents a negative, say brokers, but it is likely to be the last of its kind and was always on the cards.

The Canadian government’s move not only brings it into line with other English speaking Commonwealth governments; it represents the final stage of the opening of the Canadian market.

Structural Growth Story Intact

Brokers argue the underlying prognosis for IDP Education remains positive, although international demand in a major market such as India is showing signs of pressure.

IDP Education experienced an exceptional post-covid recovery, while benefiting from digitisation during the pandemic, which has cut staff costs.

Most brokers believe the covid reopening is likely to deliver continued growth in the near to medium term.

Meanwhile, the rising middle class in emerging economies offers long-term structural support to the industry, as does the desire for an international education in English speaking countries.

Most brokers expect IDP Education will be able to strengthen its competitive position within this upward trajectory in the medium-term given its scale relative to competitors.

They also observe the popularity of the IELTS has delivered stronger pricing power and margins over PTEs (Progress Test in English).

Still, recent developments and the wider acceptance of the PTE is likely to affect this dynamic and cut the switching costs from IELTS to PTE.

Macquarie observes this is already the case in one of the company’s largest markets, India.

Making Adjustments

Not all brokers who actively cover IDP Education have been quick to update today. Those who have, returned with reduced estimates and lowered price targets. As a result, FNArena's consensus price target has fallen circa -6.5%, to $29.42 from $31.40, but remains well above the share price.

Morgans cuts FY24 EPS forecasts -8.7% and retains a Hold rating. Its target price falls roughly -13% to $27.70 from $31.65.

UBS retains a Buy rating and cuts its target price -9.6% to $30.25 from $33.45.

Morgan Stanley retains an Overweight rating, citing student placement operating leverage, digital investment and ongoing structural tailwinds, and cuts its target price to $32.10.

Goldman Sachs retains a Buy rating and cuts its target price -14% to $30.60 from $35.70.

Macquarie retains an Outperform rating and cuts its target price about -5.5% to $34 from $36.

Ord Minnett has not yet updated. Its last entry in the FNArena database in February was for a Lighten rating and $22.50 target price.

Being the least optimistic of the broker set, Ord Minnett is unlikely to greet the Canadian news positively given it considered IELTS to be the strongest segment of the company. 

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