Might FY25 Be The Trough For IDP Education?

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

Following tighter student visa restrictions in Canada and the UK, Australia has now followed suit, further impacting on IDP Education’s earnings. But brokers see a trough ahead.

-Australia tightens student visa restrictions
-IDP Education downgrades forecasts
-Ongoing market share gains expected
-Longer term growth outlook intact

By Greg Peel

In February this year the number of international students in Australia topped 700,000 for the first time, helping to drive the number of temporary entrants to 2.8m, which was also a record. Post-covid, the government strove to boost migration levels in order to restore the economy, but the policy was to pursue permanent rather than temporary migration.

Yet, the extent of international student migration meant the country was sitting on the largest temporary migration number in history.

In March, the government begun to implement several key recommendations of a migration review, including: lifting English language requirements for student visas; new powers to suspend high risk education providers from recruiting international students; and a new genuine student test will be introduced to further crack down on international students looking to come to Australia primarily to work rather than study.

The test will ask students to answer questions about their study intentions and economic circumstances, with a declaration to be made they understand what it means to be a genuine student.

More generally, the government has introduced new visa approval rates as part of a plan to cut net overseas migration in half year-over-year in FY25.

At the start of 2024, Canada announced a temporary two-year cap on international student visa applications with an implied reduction of -28% in new permits this calendar year. The UK's method to cut numbers has been to lift financial capacity requirements for international students, alongside tougher compliance standards for institutions.

The declines in international student visa approvals in Canada and the UK were -27% and -21% lower respectively in the first three months of 2024.

IDP Education ((IEL)) provides International English Language Tests (IELT) and Student Placement (SP) services for international students looking to study in, among other countries,  Australia, Canada and the UK.

Tough Times

IDP’s share price peaked over $37.00 in October 2021 as international students began to flow in again post covid lockdowns. It’s been all downhill from there. At the beginning of 2024, the stock was trading under $20.00 and as the difficult year unfolded, hit a low under $14.00.

As each country mentioned announced restrictions on student migration, investors sold down the stock. On each occasion, brokers were forced to reset their earnings expectations accordingly. Analysts agreed the underlying thesis remained intact, and IDP remained a solid longer term prospect, being the world’s largest such service provider.

IDP Education is widely considered to be “quality” amidst less respected competitors, showing with each hit to student numbers in its territories, it was able to grow market share.

When the Australian government became the last to announce student migration restrictions, IDP was sold down once more. Brokers again responded by lowering earnings forecast in anticipation of IDP providing updated guidance on the impact it would endure.

Hedge funds have also been responding over the course of the year. As of last week, IDP Education shares were the second most shorted stock on the ASX at 12.8%.

The Reality

Last week management at IDP Education delivered the anticipated update.

FY24 earnings are expected to be broadly in line with FY23, which Jarden estimates implies earnings growth of around 34% in the second half of FY24. SPs should grow 15-20% according to management, which is above prior consensus forecast. But IELT volumes are expected to fall -15-20%, which is more than consensus had feared.

The company expects FY25 global system student volumes to fall -20-25% year on year due to current policy and market trends, but it remains confident in a subsequent recovery. This is broadly in line with consensus expectations but IDP management also noted it would likely see less volume outperformance in FY25, creating uncertainty regarding market share forecasts.

Management remains positive on the industry's long-term growth drivers, Jarden notes, given the majority of policy regulation is intended to target low-quality agents, which, if successful, should produce market share gains, and the company holds a view that international students are necessary for education and immigration policy.

IDP is confident it can outperform the market, as it has a track record of doing so. Barrenjoey notes the company has grown its share by 15-20% in FY24 while the industry in general has seen a -15% decline.

Management’s anticipated volume trough is deeper than Goldman Sachs anticipated, with IELTs softness front-loaded into the second half FY24 and first half FY25 given weaker sentiment from Indian and South Asian students, in addition to competition in testing in Canada.

SPs are now expected to decline in FY25 against the industry, contracting -20-25% following various regulatory tightening measures in the destination markets, though Goldman expects IDP to materially outperform the industry based on its higher-quality customer base and its position as a trusted brand for both universities and students.

Ord Minnett notes management’s guidance to a -15-20% decline in IELTs and a 15-20% increase in SPs in FY24 compares to first half IELTs down -12% and SPs up 33%. The expected FY24 SP performance implies significant outperformance relative to industry volumes that are expected to decline, which Ord Minnett finds “impressive” given IDP’s volumes increased by 53% in FY23.

The Response

In response to declining volumes, company management has announced a cost-out program that will focus on reducing discretionary spend in travel, consultants, IT and marketing and reducing staff by -6%, or around -400 employees, across nine countries where the capacity for efficiencies were recognised.

The change to IDP’s office and testing footprint will nevertheless be minimal and there will be minimal impact on revenue-generating roles. The cost reduction program is designed to align expenses to the near term outlook, yet the company still intends to implement incremental expenditure for the purpose of investing in long term growth.

IDP wants to manage costs in line with revenue, Jarden notes, but may need to retain excess capacity for when the market recovers.

Analysts also note solid growth in average fees have provided an offset to the softer volume environment.

The Outlook

IDP’ Educations share price suffered another whack last Thursday in response to management’s update, but quickly recovered around half that loss on the day, followed by further gains on the following days. Today, the share price is some -50c below where it was prior to the profit warning issued. As to how much of that was to do with short-covering is unclear.

The question for investors is can it get any worse for the company in FY25?

Common among broker reports following the update was a cut to earnings forecasts in accordance with guidance and a warning that consensus forecasts remain too high. But given all brokers reset their expectations, one assumes consensus has now aligned at lower levels, and hence is no longer too high.

The question then is whether FY25 will represent an earnings trough.

Macquarie believes an earnings trough is close as softer SP and IELTs volumes in FY25 will be partly offset by the cost-out program. The broker also cites a potential impact from election results in the UK next month and Australia by May 2025, noting “no government has successfully grown an economy without net migration over the last several decades and we think an outcome with elections will provide a pathway to reducing regulatory pressure on student visas”.

Macquarie has retained a Neutral rating.

UBS remains positive on the longer term structural story and SP market share gains, but wants to see the extent to which consensus is adjusted down before moving off its Neutral rating.

Medium term, Morgans expects a return to “system” growth; market share gains given quality and technology advantages; ongoing price growth and geographic expansion. However, trading on 28x FY25 PE, this broker also thinks the near-term earnings multiple allows some further time to assess short-term earnings outcomes. Medium term, Morgans is positive on the investment case and believes value has emerged.

Morgans has a Hold rating.

The longer term outlook has been key to broker views throughout a year of visa restrictions in IDP’s markets. Ord Minnett agrees the international education industry, and immigration more broadly, remain important economic growth drivers. This broker thus believes the shares remain undervalued and expects the company to benefit in the longer term.

Ord Minnett retains an Accumulate rating (which sits between Hold and Buy).

Morgan Stanley sees current trends as short term, cyclical and politically influenced, noting management continues to expect positive long term structural trends to be supportive of its core business.

Morgan Stanley is Overweight. 

Six brokers monitored daily by FNArena cover IDP Education, albeit Bell Potter (Hold) has not yet responded to the update. There are two Buy or equivalent and four Hold ratings among them.

Following cuts to target prices, the consensus target has fallen to $19.86 from $21.74, suggesting 31% upside. Macquarie is the low marker on $16.00.

Beyond daily-monitored brokers there is greater confidence at the rebased settings.

Goldman Sachs retains Buy, cutting its target by -14% to $21.75.

Jarden retains Overweight, cutting its target to $17.75 from $19.70.

Barrenjoey also has Overweight, with a target cut to $23.00 from $24.00.

Evans & Partners has a “Positive” recommendation following a cut to $20.10 from $23.09. 

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.

FNArena is proud about its track record and past achievements: Ten Years On

Click to view our Glossary of Financial Terms