IDP Education Shifts Into Fastlane Acceleration

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

Lots of negative speculation preceded, but FY23 results for IDP Education were well received by brokers with technology initiatives suggesting ongoing growth.

-FY23 results cause analysts' price targets to rise for IDP Education
-Record high student placements, softer IELTS volumes
-FY24 costs to rise as management invests for growth
-New Fastlane platform accelerates student placements

By Mark Woodruff

Last week’s FY23 results for IDP Education ((IEL)) demonstrated how record high market share for student placement (SP) is outweighing competitive risks surrounding the company's English proficiency tests.

The business continues to benefit from the return of students to study in Australia, the opening of borders, normalisation of migration policies and long-term demand for higher education.

In the words of some analysts, IDP Education's impressive pricing power was also on show. Ord Minnett noted the average fees for English language testing and SP rose by 6% and 7%, respectively, while English language course fees rose by 20%. The latter partly reflects a return to in-person teaching.

The company now has a 6.3% market share in student placement, up from 5.8% in FY22.

While Macquarie had previously highlighted ongoing network effects would increase market share, the broker responded to FY23 results by upgrading its rating to Neutral from Underperform. Prior to last week's update, Macquarie had been noticeably vocal in expressing concerns about competitive pressures and future margins, but these worries have been buried in the background now.

Likewise, Morgans upgraded to Add from Hold due to SP leads, applications and enrolments growing by 26%, 40% and 54%, respectively.

IDP Education 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 to source students.

The overall FY23 result was in line with broker’s expectations with underlying profit and earnings rising by 48% and 39.6%, respectively, on the previous corresponding period, while revenue increased by 24%.

While the overall revenue outcome was in line with expectations, International English Language Testing System (IELTS) revenues proved a -3.1% miss against the consensus forecast due to -3.8% weaker volumes. This decline was driven by lower Indian volumes into Canada somewhat offset by higher fees, explained Jarden.

IELTs volumes fell by -10% half-on-half in the second half, offset by a strong Australian placement outcome, notes Morgans, with gross profit rising by 64% for the year.

A 62.5% FY23 gross margin was 90bps better than consensus expected, helped by stronger margins in IELTS, SP and Teaching. Digital Marketing & Events disappointed on margin and higher overhead costs led to the in-line earnings result.

IDP Education is a one-third co-owner of the IELTS, the world’s largest 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.

Back in late-May, the IDP Education share price fell hard after management announced the company had lost its Canadian monopoly over providing English tests for student visas.

At the time, Goldman Sachs pointed out more than 80% of its incremental earnings forecasts for the company over FY23-25 were driven by Student Placement, while each -10% Canada market share loss for IELTS impacted the analyst's FY24 group earnings forecast by around -3% only.

Last week, this Buy-rated broker suggested the company is well placed to deliver substantial operating leverage as student placement scales-up, given improvements in agent productivity and prior investments in technology.

Cost efficiencies in student placement included a 24% lift for counsellor productivity, while 60% of volumes were directed through the centralised processing hub.

IDP Education declared a 17% franked final dividend of 20cps, bringing the FY23 total to 41cps, a rise of 52% on FY22. Ord Minnett believes the company is well placed to deliver on its unchanged forecast for a 70% dividend payout ratio.

New product and platform

Regarding technology, Buy-rated UBS highlighted the acceleration potential for student placements via the new Fastlane platform, and the improving competitive position in IELTS, thanks to the rollout of One Skill Retake.

Part of management’s response to competition in English language testing is differentiation via product, and One Skill Retake is a key initiative which allows students to retake one of the four skills of listening, reading, writing or speaking.

The product has now been approved in the UK, in addition to Australia, and while approval in Canada is not imminent, Morgans noted it will provide a significant lever to retain market share.

There was strong second half acceleration for Fastlane, with around 50% of courses on the platform and 18 new universities added. Fastlane allows students to search, match and receive an in-principle offer on their smartphone. Once details are verified and students apply, progress updates can be viewed in real time.

Management is targeting 25,000-30,000 placements via FastLane as the company looks to add further functionality, courses and clients onto the platform. Conversion outcomes are 6.3% higher and growth is being accelerated, as evidenced by an increase in conversions by more than 50% half-on-half.

Outlook

Management provided no formal FY24 guidance, but flagged further overhead cost expansion due to ongoing investment as the business grows. FY24 overhead cost growth of 10-15% is expected.

Bell Potter downgraded its rating to Hold from Buy on valuation and reduced its price target by -1.1% after downgrading FY24 and FY25 EPS forecasts due to slightly increased overhead cost estimates and reductions in IELTS forecasts.

Last week, Jarden forecast ongoing operating leverage which should support margin expansion from here, while disciplined cost management should balance future growth with near-term challenges.

Morgan Stanley maintained its Overweight rating for IDP Education based on operating leverage and a volume recovery for SP, digital investment and the consolidation optionality, along with exposure to structural growth.

FNArena’s daily monitoring consists of six brokers with three Buy (or equivalent) ratings and three Hold recommendations. The average target price rose to $27.79 from $26.84 following FY23 results, which suggests around 10.70% upside to the latest share price.

Goldman Sachs (Buy) and Overweight-rated Jarden are not monitored daily. They have an average target price of $30.25.

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