Treasure Chest | Jul 10 2023
FNArena's Treasure Chest reports on money making ideas from stockbrokers and other experts. Today's idea relates to IDP Education.
By Mark Woodruff
Whose Idea Is It?
The analyst at Goldman Sachs.
The subject:
Back in late-May, the IDP Education ((IEL)) share price fell hard after management announced the company had lost its Canadian monopoly over providing English tests for student visas.
The Canadian government had decided to accept four new English tests for student visas in its Student Direct Stream visa class from August this year, in addition to IDP Education’s International English Language Testing System (IELTS).
New research by Goldman Sachs suggests the share market may have overreacted to news of this greater competition, and market focus will shift back to the long-term structural growth opportunity in the tertiary Student Placement segment of the business once this becomes clear.
IDP Education is a one-third co-owner of IELTS, the world’s largest high stakes English proficiency test 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.
Goldman Sachs notes IELTS still has five times the testing volumes of PTE globally and holds 50-60% market share in Australia. No doubt, the share market was concerned around 45% (900,000 tests) of IDP’s IELTS volumes relate to the Canada destination market.
Thankfully for IDP shareholders, the broker points out more than 80% of its incremental earnings forecasts for the company over FY23-25 are driven by Student Placement, while each -10% Canada market share loss for IELTS impacts the analyst's FY24 group earnings forecast by around -3% only.
The broker estimates IELTS held around 65% market share in 2022 across study, work and migration-related testing and forecast market volume growth of 5-10% per year to 2030, broadly in line with historical averages.
This outlook is based on forecasts by research and analytics platform HolonIQ, which are dragged down by minimal growth expectations for China (in which IDP does not administer IELTS tests), explains the broker.
In India, which represents around 50% of IDP’s IELTS volumes, growth of 15% is forecast for 2023/24 and around 8% out to 2030.
After allowing for the relatively minor earnings impacts from upside/downside scenarios for IELTS, and after attaining greater confidence on potential outcomes for IELTS volumes, Buy-rated Goldman Sachs suggests the current share price for IDP Education represents attractive value.
More info:
Regulation changes by the Canadian government were also deemed immaterial to the IDP investment thesis when Ord Minnett (Hold) released research in early-June.
Apart from not being surprised (the company flagged risks at interim results), this broker wasn’t assuming indefinite exclusivity for Canadian Student Direct Scheme visas anyway, given the acceptance by UK and Australian governments of additional English language tests for both migration and study purposes.
The analyst noted limited earnings downside for IDP and reminded investors the UK government accepted three additional tests in 2020, when IDP had exclusivity, yet the company continues to hold 90% market share for UK visa purposes for candidates outside the UK.
However, not all brokers are as buoyant on the outlook as Ord Minnett and Goldman Sachs.
Neutral-rated Macquarie is concerned about competition in IELTS and group margins more broadly.
Just prior to financial year’s-end, this broker lowered its FY23-26 EPS forecasts by around -4% to reflect weaker-than-anticipated northern-hemisphere student market growth, and revised-down its multi-destination market growth assumption to 10% from 20%.
The analyst noted multi-destination Student Placement remains challenged in Canada and the UK relative to Australia, and felt post-covid pent-up demand had come off the boil with both markets having reverted to more normalised growth trends.
In Australia, the latest data points reaffirmed Macquarie’s confidence that the Australian Student Placement business should outperform consensus expectations.
Overall, the broker’s investment thesis for IDP Education is ongoing market share momentum in student placement offset by increasing competition for IELTS.
FNArena’s daily monitoring consists of six brokers with three Buy (or equivalent) ratings and three Hold recommendations. The average target price is $26.82, which suggest just under 28% upside to the latest share price.
Goldman Sachs (Buy) is not monitored daily. This broker lowers its target price to $28.90 share from $30.60 as a result of today’s research.
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