Small Caps | 2:57 PM
Stronger cost reductions, resilient pricing and growing China exposure encourages analysts to back IDP Education despite headwinds and near-term earnings risks.
- IDP Education reveals larger cost savings and share buyback
- Visa restrictions continue to weigh on volumes
- China expansion offers a key growth lever
- Multiple product initiatives designed to reinvigorate growth
By Mark Woodruff
Long-suffering shareholders in global education provider IDP Education ((IEL)) would have been buoyed when brokers Morgans and Jarden upgraded their respective ratings to Buy in early June.
A subsequent trading update late last week suggests both were ahead of the market. While the macroeconomic backdrop remains challenging for the former high-achieving market darling, stronger yields and cost reductions have provided an offset.
At the time of its rating upgrade, Morgans was prepared to look through recent share price weakness, citing enduring demand for international education, a leaner cost base, growing upside from China and ongoing investment in technology and product development.
Positively, the China IELTS business is scaling rapidly, the broker suggested, with test centres increasing to 13 from five in the first half.
Equally, Jarden felt China represents the key upside opportunity.
Jarden also noted IELTS volumes are more resilient than Student Placement in the near term, though growth is likely to remain subdued until a broader recovery in student placements emerges.
The trading update
Management provided better-than-expected cost reductions in last week's trading update. Further reductions are expected in FY27 to “more than offset natural cost inflation”.
IDP has achieved $30m in cost savings versus its previous $25m target for FY26.
The company also updated FY26 guidance for adjusted earnings (EBIT) of around $122m which sits within previous guidance.
After listing on the ASX at $2.65 in November 2015, the share price climbed to more than $40 in 2021 before entering a prolonged and consistent decline, recently hitting a 52-week low of $2.00.
Overall, Morgans views the company’s prior earnings reset as cyclical rather than structural, noting continued yield growth throughout the downturn highlights the strength of its franchise and underlying pricing power.
While tighter visa settings across IDP’s four key destination markets have materially reduced student volumes, underlying demand for international education remains underpinned by favourable Asian demographic trends, the broker explains.
It’s also noted the company retains its leading market position in both English Language Testing System (IELTS) testing and student placement services.
Inside IDP's Operations
IDP’s revenue is tied to international student flows and English test demand, so it is exposed to changes in migration policy, visa settings, and study-abroad trends.
Morgans noted ongoing pricing power across both Student Placement and IELTS.
The company’s main business is Student Placement, where it connects prospective students with universities and colleges in countries such as Australia, the UK, Canada, the US, and New Zealand.
IDP also co-owns IELTS, one of the world’s most widely accepted English language tests.
These high-stakes English assessments may determine eligibility for university admission, professional certification, employment, or migration.
In addition to placement and testing, IDP runs English language schools, education events, and consultancy services for institutions.
Its business model combines human advisers with digital tools to guide students from course search through enrolment.
Updated views following the trading update
Morgans suggests a new $50m on-market share buyback is the key highlight of the market update, noting management expects FY27 gearing to remain broadly unchanged.
While expecting further net cost reductions, Macquarie suggests ongoing deleveraging would have been a more prudent use of capital instead of the buyback given current policy uncertainty.
The analyst at Morgans slightly improves his margin assumptions given strong ongoing cost discipline and pricing power.
UBS is also encouraged by the broadly in-line update.
The key question, in this broker’s view, is whether this pulls forward additional cost savings earmarked for FY27.
Even if that proves to be the case, UBS does not view it negatively, as it provides more time for a recovery in top-line growth to offset earnings pressures.
The vulnerable-looking balance sheet had been one key focus among shorters looking to profit from further share price weakness, but UBS counters with the observation management has again delivered on its net debt-to-EBITDA target and --equally important-- guided to similar gearing over the next twelve months.
Preliminary research by UBS analysts also suggests the company could repurchase around 7% of its shares at current prices, which would be approximately 6% earnings accretive on a full-year basis.
Student placements accounting
Revenue recognition in the Student Placement segment follows a multi-step process.
A student first applies for and receives a visa, then enrols and commences study. Revenue is subsequently recognised at the census date (sometimes months later), the point at which enrolments are largely confirmed, and students remain liable for fees.
Thus, IDP Education's move to census-date revenue recognition has introduced a timing lag between improvements in visa processing and approvals, and the recognition of associated Student Placement revenue, Morgans recently explained.
As a result, stronger visa trends may take longer to be reflected in reported earnings than under the previous accounting approach.
Jarden expected IDP’s volumes to track closer to processed visa volumes than granted volumes, reflecting the company's historically stronger visa approval rates as a higher-quality operator.
Traditionally, the company tends to place better-qualified students and provides stronger application support.
Government policy
Back in early May, an assessment of March 2026 Australian visa data by UBS revealed that, despite earlier government signals of higher international student intake, visa approvals and, more notably, rising rejection rates suggest otherwise.
UK applications weakened further in the March quarter, while Canadian visa applications remained well below already weak comparable periods.
Combined with uncertainty stemming from the Middle East conflict and ongoing cost-of-living pressures, UBS believed near-term operating conditions had become materially more challenging for the company.
Cost out
Macquarie cautions increasing total cost reductions beyond -$60m would lower overheads to below 34% of revenue by FY28, near the bottom of the past decade’s range and potentially limiting the company's capacity to grow from FY27 onward.
Looking to FY28, Macquarie sees downside risk to consensus forecasts as the global election cycle intensifies, with elections due in Australia, the US and the UK.
Immigration is expected to remain a prominent campaign issue, with heightened political focus from mid-2027 potentially weighing on foreign student sentiment and volumes.
Macquarie also sees downside risk to FY27-FY28 IELTS volumes if more students choose Test of English as a Foreign Language (TOEFL) in Canada, although this is expected to be more than offset by continued expansion in China.
Investment in technology and product development
IDP has several product initiatives designed to improve conversion, customer experience and monetisation across the student placement and IELTS businesses.
Morgans recently mentioned Navi, the company’s digital student marketplace and counselling platform, which allows students to search courses, compare institutions, access counselling services, submit applications and track progress throughout the study-abroad journey.
The platform is intended to improve student conversion while increasing counsellor productivity.
FastLane is another initiative designed to accelerate the admissions process by providing students and counsellors with rapid indications of eligibility from participating institutions, often within minutes rather than days or weeks.
Morgans also pointed to One Skill Retake, an IELTS offering that allows candidates to retake a single test component rather than the entire exam. This product aims to improve customer satisfaction, support test volumes and provide an additional revenue opportunity.
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